Attached files
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EX-10.65 - CROCKETT EMPLOYMENT AGREEMENT - ABVC BIOPHARMA, INC. | employmentagreementcrockett.htm |
EX-10.66 - IANNOTTI EMPLOYMENT AGREEMENT - ABVC BIOPHARMA, INC. | employmentagreementiannotti.htm |
EX-10.63 - SECURITIES PURCHASE AGREEMENT WITH STROMBACK ACQUISITION CORPORATION - ABVC BIOPHARMA, INC. | securitiespurchaseagreement.htm |
EX-10.70 - JB SMITH LC PROMISSORY NOTE AUGUST 11, 2009 - ABVC BIOPHARMA, INC. | jbsmithlcpromnote.htm |
EX-10.68 - SECOND AMENDMENT OF SALLY RAMSEY EMPLOYMENT AGREEMENT - ABVC BIOPHARMA, INC. | secondamendramsey.htm |
EX-10.67 - KROTINE EMPLOYMENT AGREEMENT - ABVC BIOPHARMA, INC. | employmentagreementkrotine.htm |
EX-10.69 - SKY BLUE PROMISSORY NOTE SEPTEMBER 10, 2009 - ABVC BIOPHARMA, INC. | skybluepromissorynote.htm |
UNITED
STATES
Securities
and Exchange Commission
Washington,
D.C. 20549
Amendment
No. 3 to
Form
S-1
Registration
Statement Under The Securities Act of 1933
ECOLOGY
COATINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State or
other jurisdiction of incorporation or organization)
3479
(Primary
Standard Industrial Classification Code Number)
26-0014658
(I.R.S.
Employer Identification Number)
2701
Cambridge Court, Suite 100, Auburn Hills, MI 48326
248-370-9900
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Daniel
V. Iannotti, Vice President, General Counsel & Secretary
Ecology
Coatings, Inc.
2701
Cambridge Court, Suite 100
Auburn
Hills, MI 48326
248-370-9900
(Name,
address and telephone number of agent for service)
APPROXIMATE
DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time
to time after this Registration Statement becomes effective.
If any securities being registered on
this Form are to be offered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box: x
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.o
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
1
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Security To be Registered
|
Amount
to be Registered (1)
|
Proposed
Maximum Offering Price per Share (2)
|
Proposed
Maximum Aggregate Offering Price (3)
|
Amount
of Registration Fee
|
Common
Stock, $.001 par value per share
|
4,340,000
|
$1.05
|
$4,557,000
|
$254.28(4)
|
(1)
|
Represents
only shares offered by the selling shareholder. Includes
4,340,000 shares of common stock issuable upon conversion of certain of
the 5% convertible preferred shares held by the selling shareholder and
does not include shares held by any other
shareholder.
|
(2)
|
Represents
the closing price of our common stock on the OTC Bulletin Board
association on August 27, 2009.
|
(3)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(e) under the Securities Act of
1933.
|
(4)
|
Amount
was previously paid.
|
____________________________
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the SEC, acting pursuant to said Section 8(a), may
determine.
2
Subject
to Completion
Preliminary
Prospectus Dated January 11, 2010
4,340,000
Common Shares
Ecology
Coatings, Inc.
_______________________________
This
prospectus relates to the offer and sale of up to 4,340,000 shares of our common
stock held by Equity 11, Ltd. (the “selling shareholder” identified in this
prospectus). The selling shareholder intends to sell the shares of our common
stock held by it from time to time at a time that is determined based on its
assessment of market conditions. JB Smith, a member of our Board of
Directors, is the managing partner of Equity 11. This prospectus only
relates to shares held by the selling shareholder. We will not
receive any of the proceeds from the sale of these shares by the selling
shareholder. Subject to any agreement that we may in the future reach in
connection with the offer and sale of shares pursuant to this prospectus, we
will bear all expenses of this offering, except that the selling shareholder
will pay all transfer taxes and any brokerage discounts or commissions or
similar expenses applicable to the sale of its shares.
We are
registering the offer and sale of these shares pursuant to an agreement with the
selling shareholder. The shares offered under this prospectus are being
registered to permit the selling shareholder to sell the shares in the public
market at a time that it determines based on its assessment of market
conditions. The selling shareholder may sell the shares through any means
described in the section titled "Plan of Distribution."
Our
common stock is not presently traded on any national securities exchange but is
quoted and traded on the Over-The-Counter Bulletin Board. The last
reported sale price of our common stock on January 5, 2010, was $0.24 per
share.
Investing
in our common stock involves risks. See "Risk Factors" below.
__________________________
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is January 11, 2010
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
3
TABLE
OF CONTENTS
Page
|
|
Item
1: Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus
|
1
|
Item
2: Inside Front and Outside Back Cover Pages of
Prospectus
|
3
|
Item
3: Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges
|
5
|
Item
4: Use of Proceeds
|
15
|
Item
5: Determination of Offering Price
|
15
|
Item
6: Dilution
|
17
|
Item
7: Selling Shareholder
|
17
|
Item
8: Plan of Distribution
|
25
|
Item
9: Description of Stock to be Registered
|
27
|
Item
10: Interests of Named Experts and Counsel
|
33
|
Item
11: Information With Respect to the Registrant and Financial
Information Schedules
|
33
|
Item
11A: Material Changes
|
64
|
Item
12: Incorporation of Certain Information by
Reference
|
64
|
Item
12A: Disclosure of Commission Position On Indemnification For
Securities Act Liabilities
|
64
|
Item
13: Other Expenses of Issuance and Distribution
|
65
|
Item
14: Indemnification of Directors and Officers
|
65
|
Item
15: Recent Sales of Unregistered Securities
|
65
|
Item
16: Exhibits
|
68
|
Item
17: Undertakings
|
70
|
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We and the
selling shareholder have not authorized anyone to provide you with information
different from that contained in this prospectus. This prospectus may only be
used where it is legal to sell these securities. You should assume that the
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of common stock. Our business, financial condition, results of operations and
prospects may have changed since that date.
4
ITEM
3: SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED
CHARGES
This
summary highlights information contained elsewhere in this prospectus. This
summary sets forth the material terms of the offering, but does not contain all
of the information that you should consider before investing in our common
stock. You should read the entire prospectus carefully before making an
investment decision, especially the risks of investing in our common stock
described under "Risk Factors." Unless the context otherwise requires, the terms
"we," "us," "our," and "Ecology" refer to Ecology Coatings, Inc. and its
predecessors, direct and indirect subsidiaries and affiliates.
ECOLOGY
COATINGS, INC.
Our
Company
Ecology
Coatings, Inc. (“Ecology-CA”) was originally incorporated in California on March
12, 1990. OCIS Corp. (“OCIS”) was incorporated in Nevada on
February 6, 2002. OCIS completed a merger with Ecology-CA on
July 27, 2007 (the “Merger”). In the Merger, OCIS issued
approximately 30,530,684 shares of common stock to the Ecology-CA
stockholders. In this transaction, OCIS changed its name from OCIS
Corporation to Ecology Coatings, Inc. and our ticker symbol on the OTC Bulletin
Board association changed to “ECOC.” As a result of the merger, we
became a Nevada corporation and Ecology-CA became a wholly owned
subsidiary.
Company
Overview
We
develop “clean tech”, nanotechnology-enabled, ultra-violet (“UV”) curable
coatings that are designed to drive efficiencies, reduce energy consumption,
create new performance characteristics and virtually eliminate pollutants in the
manufacturing sector. We create proprietary coatings with unique
performance and environmental attributes by leveraging our platform of
integrated clean technology products that reduce overall energy consumption and
offer a marked decrease in drying time.
Our
patent and intellectual property activities to date include:
|
·
|
seven
patents covering elements of our technology from the United States Patent
and Trademark Office(“USPTO”)
|
|
·
|
two
European patents allowed and nine pending patent applications in foreign
countries
|
|
·
|
one
ICT international patent
application
|
|
·
|
three
trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and
“Liquid Nanotechnology™”
|
·
|
200+
proprietary coatings formulations.
|
We continue to work independently on developing our clean technology products
further. Our target markets include electronics, steel, construction, automotive
and trucking, paper products and original equipment manufacturers
(“OEMs”). Our business model contemplates both licensing and direct
sales strategies. We intend to license our technology to industry
leaders in our target markets, through which products will be sold to end
users. We plan to use direct sales teams and third party agents in
certain target markets, such as OEMs, and third party distributors in broad
product markets, such as paper products, to develop our product
sales.
5
Our
website address is www.ecologycoatings.com. Our
website and the information contained on our website are not incorporated into
this prospectus or the registration statement of which it forms a
part. Our principal executive offices are located at 350 Fifth
Avenue, Suite 100, Auburn Hills, MI 49326. Our telephone
number is 248-370-9900.
The
Offering
Common
Stock Offered by the Selling Shareholder hereby
|
4,340,000
shares issuable upon the conversion of outstanding shares of preferred
stock – such 4,340,000 shares will be converted from 2,170 preferred
shares acquired under the August 28, 2008 Securities Purchase Agreement at
an aggregate purchase price of $2,170,000 and at a conversion price of
$.50 per share. No shares of any other shareholder are included
in this registration.
|
Common
Stock Outstanding Before and After this Offering
|
32,910,684
common shares issued and outstanding as of December 31, 2009 and
37,250,684 common shares issued and outstanding after this offering which
includes 4,340,000 common shares converted from convertible preferred
stock by the selling shareholder. (1)
|
Use
of Proceeds
|
We
will not receive any proceeds from the shares sold by the selling
shareholder.
|
Plan
of Distribution
|
The
selling shareholder plans to sell up to all of the shares being offered in
this offering from time to time at a time determined by its assessment of
market conditions. See “Plan of Distribution”
for additional information.
|
Risk
Factors
|
You
should carefully read and consider the information set forth under the
heading titled “Risk Factors” and all other information set forth in this
prospectus before deciding to invest in shares of our common
stock.
|
Over-The-Counter
Bulletin Symbol
|
“ECOC”
|
(1)
|
Based
on shares outstanding on December 31, 2009. This figure does
not include shares which may be issued upon exercise or conversion of
stock options, warrants or shares which may be issuable under outstanding
promissory notes. Although four of our outstanding promissory
notes were initially convertible into our common stock, the right to
convert was extinguished because we did not complete an underwritten
public or private stock offering in which we netted $1,000,000 or more by
the maturity dates of the notes. However, we are in discussions
with these note holders and we may allow some or all of these notes to
convert into our common stock as a method to conserve our
cash. If these notes are converted into common stock, our
number of shares outstanding will increase. See Item 9 for
further information regarding the conversion of such notes. As
of December 31, 2009, we had 55,488,119 shares of common stock
beneficially outstanding, including 32,910,684 common shares issued and
outstanding, 2,497 convertible preferred shares convertible into 4,994,000
common shares, 1,016 convertible preferred shares Series B convertible
into 9,525,799 common shares, warrants to acquire 4,532,900 common shares
and stock options vested or that will vest within sixty days of December
31, 2009 to acquire 3,525,119 common shares. Of the 55,488,119
common shares beneficially outstanding as of December 31, 2009, 35,057,716
were held by affiliates and 20,430,786 were held by non-affiliates.
For purposes of the foregoing, we have treated all shares held by
executive officers, directors and Equity 11 as “affiliate”
shares.
|
6
Unless otherwise noted, all information in this prospectus assumes the
conversion of 2,170 5% convertible preferred shares held by the selling
shareholder with an aggregate purchase price of $2,170,000 into 4,340,000 shares
of common stock.
7
Risk
Factors
Prospective
and existing investors should carefully consider the following risk factors in
evaluating our business. The factors listed below represent the known
material risks that we believe could cause our business results to differ from
the statements contained herein.
RISKS
RELATED TO OUR COMPANY AND OUR BUSINESS
We
have generated minimal revenue and have a history of significant operating
losses
We are a
company that has failed to generate significant revenue as yet. We
had an accumulated deficit of $22,688,817 as of September 30, 2009, $13,456,402
of this amount is due to non-cash items, including options expense, the issuance
of warrants, beneficial conversion provisions associated with issuance of
preferred stock and certain debt, and stock issued to pay for services,
payables, and debt extensions . We have a limited operating history
upon which investors may rely to evaluate our prospects. Such
prospects must be considered in light of the problems, expenses, delays and
complications associated with a business that seeks to generate more significant
revenue. We have generated nominal revenue to date and have incurred
significant operating losses. Our operating losses have resulted
principally from costs incurred in connection with our capital raising efforts
and becoming a public company through a merger, promotion of our products, and
from salaries and general and administrative costs. We have
maintained minimal cash reserves since October 2008 and have relied solely on
additional investment from Equity 11 and from Stromback Acquisition Corporation
(“SAC”). Neither Equity 11 or SAC is committed to make any additional
investments in us. We will need to raise additional capital from
Equity 11, SAC or other investors in fiscal year 2010 in order to continue to
fund our operations.
We
have entered the emerging business of nanotechnology, which carries significant
developmental and commercial risk
We have
expended in excess of $1,000,000 to develop our nanotechnology-enabled and other
products. We expect to continue expending significant sums in pursuit
of further development of our technology. Such research and development involves
a high degree of risk as to whether a commercially viable product will
result.
We
expect to continue to generate operating losses and experience negative cash
flow and it is uncertain whether we will achieve future
profitability
We expect
to continue to incur operating losses. Our ability to commence
revenue generating operations and achieve profitability will depend on our
products functioning as intended, the market acceptance of our liquid
nano-technology™ products and our capacity to develop, introduce and bring
additional products to market. We cannot be certain that we will ever
generate significant sales or achieve profitability. The extent of
future losses and the time required to achieve profitability, if ever, cannot be
predicted at this point.
Our
auditors have expressed a going concern opinion
We have
incurred losses, primarily as a result of our inception stage, general and
administrative, and pre-production expenses and our limited amount of
revenue. Accordingly, we have received a report from our independent
auditors that includes an explanatory paragraph describing their substantial
doubt about our ability to continue as a going concern.
We
need immediate additional financing in January 2010 to continue our
operations.
As of
December 31, 2009, we were in default on approximately $786,209 in short term
debt, including accrued interest. Our past capital raising activities
have not been sufficient to fund our working capital, operational and debt
requirements and we will need to raise additional funds in January 2010 through
private or public financings to continue our operations. Such financing could
include equity financing, which may be dilutive to stockholders, or debt
financing, which would likely restrict our ability to make acquisitions and
borrow from other sources.
8
During
our last fiscal year ended September 30, 2009, we relied on the sale of
convertible preferred securities to fund our operations. We raised
$763,716 from the issuance of notes and the sale of convertible preferred shares
during the twelve months ended September 30, 2009. On May 15, 2009,
we entered into a Convertible Preferred Securities Agreement with Equity 11
under which Equity 11 may purchase additional shares of our preferred stock, but
we do not have any commitments for additional financing from Equity
11. On September 30, 2009, we entered into a Securities Purchase
Agreement with SAC but such agreement does not commit SAC to provide any
additional financing beyond the initial investment which netted us
$120,000. We have maintained minimal cash reserves since October 2008
and have relied solely on additional investments from Equity 11 and
SAC. While there is no maximum amount Equity 11 can invest in us
under its Securities Purchase Agreement and a $3,000,000 cap on the amount of
investment by SAC under its Securities Purchase Agreement, neither Equity 11 nor
SAC is committed to make any additional investments in us. The
preferred shares held by Equity 11 and SAC can be converted into shares of our
common stock at prices that will likely be highly dilutive to our common
shareholders.
We
are dependent on key personnel
Our
success will be largely dependent upon the efforts of our executive
officers. The loss of the services of our executive officers could
have a material adverse effect on our business and prospects. We
cannot be certain that we will be able to retain the services of such
individuals in the future. Our research and development efforts are
dependent upon a single executive, Sally Ramsey, with whom we have entered into
an employment agreement which expires on December 31, 2012. Our
success will be dependent upon our ability to hire and retain qualified
technical, research, management, sales, marketing, operations, and financial
personnel. We will compete with other companies with greater
financial and other resources for such personnel. Although we have
not to date experienced difficulty in attracting qualified personnel, we cannot
be certain that we will be able to retain our present personnel or acquire
additional qualified personnel as and when needed. On September 21,
2009, we entered into new employment agreements with our Chief Executive
Officer, Chief Operating Officer, and General Counsel and entered into an
amendment to Ms. Ramsey’s employment agreement. We do not have an
employment agreement with our Chief Financial Officer.
We
Rely on Computer Systems for Financial Reporting and other Operations and any
Disruptions in Our Systems Would Adversely Affect Us
We rely
on computer systems to support our financial reporting capabilities and other
operations. As with any computer systems, unforeseen issues may arise that could
affect our ability to receive adequate, accurate and timely financial
information, which in turn could inhibit effective and timely decisions.
Furthermore, it is possible that our information systems could experience a
complete or partial shutdown. If such a shutdown occurred, it could impact our
ability to report our financial results in a timely manner or to otherwise
operate our business. In this regard, our financial data in our accounting
software (QuickBooks) became corrupted and unusable in late June 2009 and the
backup system for our computer systems failed to backup the data. This resulted
in a delay in our ability to complete our financial statements for the June 30,
2009 quarter and to file our Form 10-Q with the SEC for such
period.
Risks Related to our
Business
We
are operating in both mature and developing markets, and there is a risk that we
may not achieve acceptance of our technology and products in these
markets
We
researched the markets for our products using our own personnel rather than
third parties. We have conducted limited test marketing and, thus,
have relatively little information on which to estimate our levels of sales, the
amount of revenue our planned operations will generate and our operating and
other expenses. We cannot be certain that we will be successful in
our efforts to market our products or to develop our markets in the manner we
contemplate.
9
Certain
markets, such as electronics and specialty packaging, are developing and rapidly
evolving and are characterized by an increasing number of market entrants who
have developed or are developing a wide variety of products and technologies, a
number of which offer certain of the features that our products
offer. Because of these factors, demand and market acceptance for new
products may be difficult. In mature markets, such as automotive or
general industrial, we may encounter resistance by our potential customers in
changing to our technology because of the capital investments they have made in
their present production or manufacturing facilities. Thus, we cannot
be certain that our technology and products will become widely accepted. We do
not know our future growth rate, if any, and size of these markets. If a
substantial market fails to develop, develops more slowly than expected, becomes
saturated with competitors or if our products do not achieve market acceptance,
our business, operating results and financial condition will be materially
adversely affected.
Our
technology is also intended to be marketed and licensed to component or device
manufacturers for inclusion in the products they market and sell as an embedded
solution. As with other new products and technologies designed to
enhance or replace existing products or technologies or change product designs,
these potential partners may be reluctant to adopt our coating solution into
their production or manufacturing facilities unless our technology and products
are proven to be both reliable and available at a competitive price and the
cost-benefit analysis is favorable to the particular industry. Even
assuming acceptance of our technology, our potential customers may be required
to redesign their production or manufacturing facilities to effectively use our
Liquid Nanotechnology™ coatings. The time and costs necessary for
such redesign could delay or prevent market acceptance of our technology and
products. A lack of, or delay in, market acceptance of our Liquid
Nanotechnology™ products would adversely affect our operations. We do
not know if we will be able to market our technology and products successfully
or that any of our technology or products will be accepted in the
marketplace.
We
expect that our products will have a long sales cycle
One of
our target markets is the OEM market. OEMs traditionally have substantial
capital investments in their plant and equipment, including the coating portion
of the production process. In this market, the sale of our coating
technology will be subject to budget constraints and resistance to change with
respect to long-established production techniques and processes, which could
result in a significant reduction or delay in our anticipated
revenues. We cannot assure investors that such customers will have
the necessary funds to purchase our technology and products even though they may
want to do so. Further, even if such customers have the necessary
funds, we may experience delays and relatively long sales cycles due to their
internal-decision making policies and procedures and reticence to
change.
Our
target markets are characterized by new products and rapid technological
change
The
target markets for our products are characterized by rapidly changing technology
and frequent new product introductions. Our success will depend on
our ability to enhance our planned technologies and products and to introduce
new products and technologies to meet changing customer
requirements. We intend to devote significant resources toward the
development of our Liquid Nanotechnology™ solutions. We are not
certain that we will successfully complete the development of these technologies
and related products in a timely fashion or that our current or future products
will satisfy the needs of the coatings market. We do not know
if technologies developed by others will adversely affect our competitive
position or render our products or technologies non-competitive or
obsolete.
There
is a significant amount of competition in our market
The
industrial coatings market is extremely competitive. Our competitors
include Akzo Nobel, PPG, Sherwin-Williams and Valspar, Allied Photochemical,
Rad-Cure (Altana Chemie), Red Spot (Fujikura), R&D Coatings, Northwest
(Ashland), DSM Desotech, Prime. Competitive factors our products face
include ease of use, quality, portability, versatility, reliability, accuracy,
cost, switching costs and other factors. Our primary competitors
include companies with substantially greater financial, technological,
marketing, personnel and research and development resources than we currently
have. There are direct competitors who have competitive technology
and products for many of our products. New companies will likely
enter our markets in the future. Although we believe that our
products are distinguishable from those of our competitors on the basis of their
technological features and functionality at an attractive value proposition, we
may not be able to penetrate any of our anticipated competitors’ portions of the
market. Many of our anticipated competitors have existing
relationships with manufacturers that may impede our ability to market our
technology to potential customers and build market share. We do not
know that we will be able to compete successfully against currently anticipated
or future competitors or that competitive pressures will not have a material
adverse effect on our business, operating results and financial
condition.
10
We
have limited marketing capability
We have
limited marketing capabilities and resources. In order to achieve
market penetration, we will have to undertake significant efforts and
expenditures to create awareness of, and demand for, our technology and
products. Our ability to penetrate the market and build our customer
base will be substantially dependent on our marketing efforts, including our
ability to establish strategic marketing arrangements with OEMs and
suppliers. We cannot be certain that we will be able to enter into
any such arrangements or if entered into that they will be
successful. Our failure to successfully develop our marketing
capabilities, both internally and through third-party alliances, would have a
material adverse effect on our business, operating results and financial
condition. Even if developed, such marketing capabilities may not
lead to sales of our technologies and products.
We
have limited manufacturing capacity
We have
limited manufacturing capacity for our products. In order to execute
our contemplated direct sales strategy, we will need to either: (i) acquire
existing manufacturing capacity; (ii) develop a manufacturing capacity
“in-house”; or (iii) identify suitable third parties with whom we can
contract for the manufacture of our products. To either acquire
existing manufacturing capacity or to develop such capacity, significant capital
or outsourcing will be required. We may not be able
to raise the necessary capital to acquire existing manufacturing
capacity or to develop such capacity. We cannot be certain that such
arrangements, if consummated, would be suitable to meet our needs.
We
are dependent on manufacturers and suppliers
We
purchase, and intend to continue to purchase, all of the raw materials for our
products from a limited number of manufacturers and suppliers.
We do not
intend to directly manufacture any of the chemicals or other raw materials used
in our products. Our reliance on outside manufacturers and suppliers
is expected to continue and involves several risks, including limited control
over the availability of raw materials, delivery schedules, pricing and product
quality. We may experience delays, additional expenses and lost sales
if we are required to locate and qualify alternative manufacturers and
suppliers.
A few of
the raw materials for our products are produced by a small number of specialized
manufacturers. While we believe that there are alternative sources of
supply, if, for any reason, we are precluded from obtaining such materials from
such manufacturers, we may experience long delays in product delivery due to the
difficulty and complexity involved in producing the required materials and we
may also be required to pay higher costs for our materials.
We
are uncertain of our ability to protect our technology through
patents
Our
ability to compete effectively will depend on our success in protecting our
proprietary Liquid Nanotechnology™, both in the United States and
abroad. We have filed for patent protection in the United States and
certain other countries to cover a number of aspects of our Liquid
Nanotechnology™. The U.S. Patent Office (“USPTO”) has issued seven
patents to us. We have four applications still pending before the
USPTO and nine patent applications pending in other countries, plus one pending
ICT international patent application.
We do not
know if any additional patents relating to our existing technology
will be issued from the United States or any foreign patent offices, that we
will receive any additional patents in the future based on our continued
development of our technology, or that our patent protection within and/or
outside of the United States will be sufficient to deter others, legally or
otherwise, from developing or marketing competitive products utilizing our
technologies.
11
We do not
know if any of our current or future patents will be enforceable to prevent
others from developing and marketing competitive products or
methods. If we bring an infringement action relating to any of our
patents, it may require the diversion of substantial funds from our operations
and may require management to expend efforts that might otherwise be devoted to
our operations. Furthermore, we may not be successful in enforcing
our patent rights.
Further,
patent infringement claims in the United States or in other countries will
likely be asserted against us by competitors or others, and if asserted, we may
not be successful in defending against such claims. If one of our
products is adjudged to infringe patents of others with the likely consequence
of a damage award, we may be enjoined from using and selling such product or be
required to obtain a royalty-bearing license, if available on acceptable
terms. Alternatively, in the event a license is not offered, we might
be required, if possible, to redesign those aspects of the product held to
infringe so as to avoid infringement liability. Any redesign efforts
undertaken by us might be expensive, could delay the introduction or the
re-introduction of our products into certain markets, or may be so significant
as to be impractical.
We
are uncertain of our ability to protect our proprietary technology and
information
In
addition to seeking patent protection, we rely on trade secrets, know-how and
continuing technological advancement in special formulations to achieve and
thereafter maintain a competitive advantage. Although we have entered
into confidentiality and employment agreements with employees, consultants,
certain potential customers and advisors, we cannot be certain that such
agreements will be honored or that we will be able to effectively protect our
rights to our unpatented trade secrets and know-how. Moreover, others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and
know-how.
Risks
related to our license arrangements
We have
licensing agreements with DuPont and Red Spot Paint & Varnish regarding
their use of our technology for specific formulations for designated
applications. The DuPont license provides multiple formulas for use
on metal parts in the North American automotive market. To date, this
license has not generated any ongoing royalty payments. We also have
a licensing agreement with Red Spot that provides formulations for specific tank
coatings. Such licenses are renewable provided the parties are in compliance
with the agreements. Although these licenses provide for royalties
based upon net sales of our UV-cured coating formulations, it is unlikely that
Red Spot or DuPont will aggressively market products with our coatings and thus
entitle us to receive royalties at any level.
We
may be precluded from registering our trademark registrations in other
countries
We have
received approval of “EcoQuick”, “EZ Recoat™”, “Liquid Nanotechnology™”,
“Ecology Coatings™” as trademarks in connection with our proposed business and
marketing activities in the United States. Although we intend to
pursue the registration of our marks in the United States and other countries,
prior registrations and/or uses of one or more of such marks, or a confusingly
similar mark, may exist in one or more of such countries, in which case we might
be precluded from registering and/or using such mark in certain
countries.
There
are economic and general risks relating to our business
The
success of our activities is subject to risks inherent in business generally,
including demand for products and services; general economic conditions; changes
in taxes and tax laws; and changes in governmental regulations and
policies. For example, difficulties in obtaining credit and financing
and the slowdown in the U.S. automotive industry have made it more difficult to
market our technology to that industry.
Risks Related to our Common
Stock
Our
stock price has been volatile and the future market price for our common stock
is likely to continue to be volatile. Further, the limited market for our shares
may make it difficult for our investors to sell our common stock for a positive
return on investment
12
The
public market for our common stock has historically been very volatile. During
fiscal year 2009, our low and high market prices of our stock were $0.25 per
share (March 24, 2009) and $2.00 per share (August 17, 2009). Any
future market prices for our shares are likely to continue to be very volatile.
This price volatility may make it more difficult for our shareholder to sell our
shares when desired. We do not know of any one particular factor that
has caused volatility in our stock price. However, the stock market
in general has experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of listed
companies. Broad market factors and the investing public’s negative
perception of our business may reduce our stock price, regardless of our
operating performance. Further, the volume of our traded shares and the market
for our common stock is very limited. During the past fiscal year,
there have been several days where no shares of our stock have
traded. A larger market for our shares may never develop or be
maintained. Market fluctuations and volatility, as well as general economic,
market and political conditions, could reduce our market price. As a
result, this may make it very difficult for our shareholder to sell our common
stock.
Control
by key stockholders
As of
September 30, 2009, Richard D. Stromback, Douglas Stromback, Deanna Stromback,
who are the brother and sister of Richard D. Stromback, respectively, Sally J.W.
Ramsey, and Equity 11 held shares representing approximately 75.4% of the voting
power of our outstanding capital stock. In addition, pursuant to the
investment agreements we entered into with Equity 11, Equity 11 has the right to
effectively control our Board of Directors with the right to appoint three of
the five members of our Board of Directors. Additionally, Equity 11
has the right to appoint our Chief Executive Officer. The stock
ownership and governance rights of such parties constitute effective voting
control over all matters requiring stockholder approval. These voting
and other control rights mean that our other stockholders will have only limited
rights to participate in our management. The rights of our
controlling stockholders may also have the effect of delaying or preventing a
change in our control and may otherwise decrease the value of the shares and
voting securities owned by other stockholders.
Our
common stock is considered a “penny stock,” any investment in our shares is
considered to be a high-risk investment and is subject to restrictions on
marketability
Our
common stock is considered a “penny stock” because it is traded on the OTC
Bulletin Board and it trades for less than $5.00 per share. The OTC Bulletin
Board is generally regarded as a less efficient trading market than the NASDAQ
Capital or Global Markets or the New York Stock Exchange.
The SEC
has adopted rules that regulate broker-dealer practices in connection with
transactions in “penny stocks.” The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
SEC, which specifies information about penny stocks and the nature and
significance of risks of the penny stock market. The broker-dealer
also must provide the customer with bid and offer quotations for the penny
stock, the compensation of the broker-dealer and any salesperson in the
transaction, and monthly account statements indicating the market value of each
penny stock held in the customer’s account. In addition, the penny
stock rules require that, prior to effecting a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the
transaction. These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for our common
stock.
Since our
common stock will be subject to the regulations applicable to penny stocks, the
market liquidity for our common stock could be adversely affected because the
regulations on penny stocks could limit the ability of broker-dealers to sell
our common stock and thus the ability of our shareholder to sell our common
stock in the secondary market in the future.
13
We
have never paid dividends and have no plans to do so in the future
To date,
we have paid no cash dividends on our shares of common stock and we do not
expect to pay cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to provide funds
for the operation of our business. Our investment agreements with
Equity 11 prevent the payment of any dividends to our common stockholders
without the prior approval of Equity 11. Dividends for the preferred
shares held by Equity 11 and SAC have not been paid in cash. Thus
far, the dividends have been paid through the issuance of additional preferred
shares.
The
issuance and exercise of additional options, warrants, and convertible
securities may dilute the ownership interest of our stockholders
To the
extent that our outstanding stock options and warrants are exercised,
convertible preferred shares are converted to common stock and/or promissory
notes are converted into common stock, dilution to the ownership interests of
our stockholders will occur.
As of
December 31, 2009, we had granted options to purchase 5,131,119 shares of our
common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007
Plan). As of December 31, 2009, we had issued warrants to purchase
4,532,900 shares of our common stock which includes 1,178,500
warrants issued to Equity 11. As of September 30, 2009, Equity 11
purchased convertible preferred shares and has been issued additional preferred
shares as dividends that are convertible into 13,120,613 common
shares. As of December 31, 2009, there was $786,209 outstanding in
principal and accrued interest on notes held by Investment Hunter, LLC, George
Resta and Mitchell Shaheen. These notes are no longer convertible but
we may grant conversion rights to these holders to reduce our need for
cash.
We
have additional securities available for issuance, which, if issued, could
adversely affect the rights of the holders of our common stock
Our
Articles of Incorporation authorize the issuance of 90,000,000 shares of common
stock and 10,000,000 shares of preferred stock. The common stock and
preferred stock can be issued by our Board of Directors without stockholder
approval. Any future issuances of our common stock or preferred stock
could further dilute the percentage ownership of our existing
stockholders.
Indemnification
of officers and directors
Our
Articles of Incorporation and Bylaws contain broad indemnification and liability
limiting provisions regarding our officers, directors and employees, including
the limitation of liability for certain violations of fiduciary
duties. In addition, we maintain Directors and Officers liability
insurance. Our shareholder will have only limited recourse against
such directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of our company under
Nevada law or otherwise, we have been advised that the opinion of the Securities
and Exchange Commission is that such indemnification is against public policy as
expressed in the Securities Act and may, therefore, be
unenforceable.
Sales
of our stock by Equity 11 may drive the price of our stock down
Our
common stock is “thinly” traded as it has very low daily trading
volume. On some trading days, no shares of our stock are
sold. In addition, we have filed a registration statement of which
this prospectus is a part for a portion of the shares held by Equity 11 and may
file additional registration statements for Equity 11’s shares as the SEC rules
may permit. Once registered, these shares may be sold on the OTC
Bulletin Board. Future sales of a substantial number of shares by
Equity 11 will likely put a downward pressure on the price of our
stock.
Short
Selling may drive the price of our stock down
14
Short
selling is the practice of selling securities that have been borrowed from a
third party with the intention of buying identical securities back at a later
date to return to the lender. The short seller hopes to profit from a decline in
the value of the securities between the sale and the repurchase, as he will pay
less to buy the securities than he received on selling them. Conversely, the
short seller will make a loss if the price of the security rises. The
ability of Equity 11 to sell a substantial number of shares once a registration
statement is effective and the downward pressure on the price of our common
stock that may result may encourage short selling of our common stock by third
parties. Such short selling will cause additional downward pressure
on the price of our stock.
FORWARD
LOOKING STATEMENTS
Except
for statements of historical fact, the information presented herein constitutes
forward-looking statements. These forward-looking statements generally can be
identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,”
“forecasts,” “foresees,” “intends,” “plans,” or other words of similar import.
Similarly, statements herein that describe our business strategy, outlook,
objectives, plans, intentions or goals also are forward-looking
statements. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, but are not limited to, our ability
to: successfully commercialize our technology; generate revenues and achieve
profitability in an intensely competitive industry; compete in products and
prices with substantially larger and better capitalized competitors;
secure, maintain and enforce a strong intellectual property portfolio; attract
immediate additional capital sufficient to finance our working capital
requirements, as well as any investment of plant, property and equipment;
develop a sales and marketing infrastructure; identify and maintain
relationships with third party suppliers who can provide us a reliable source of
raw materials; acquire, develop, or identify for our own use, a manufacturing
capability; attract and retain talented individuals; continue operations during
periods of adverse changes in general economic or market conditions, and; other
events, factors and risks previously and from time to time disclosed in our
filings with the Securities and Exchange Commission, including, specifically,
the “Risk Factors” enumerated herein.
Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements may differ from the past. You should not place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. Except as required by law, we do not undertake to update
or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
In this
prospectus, “Ecology”, “we”, “us”, or “our” refer to Ecology Coatings, Inc. and
its wholly-owned subsidiary, Ecology Coatings, Inc., a California
corporation.
ITEMS
4 and 5: USE OF PROCEEDS, DETERMINATION OF OFFERING
PRICE
We will
not receive any of the proceeds resulting from the sale of the shares held by
Equity 11, the selling shareholder.
15
Our
common stock, par value $.001 per share (the “Common Stock”), is currently
quoted on the OTC Bulletin Board under the symbol “ECOC”. The
high/low market prices of our common stock were as follows for the periods
below, as reported on http://finance.google.com. The
quotations below reflect prices without retail markup, markdown, or commission
and may not represent actual transactions. Additionally, our Merger
with OCIS was consummated on July 27, 2007. Therefore, the quotations
below for the fiscal year ended September 30, 2007 reflect quotations prior
to the completion of the reverse merger.
High
Close
|
Low
Close
|
|||||||
Fiscal
Year 2010
|
||||||||
1st
Quarter
|
$
|
.55
|
$
|
.24
|
||||
2nd
Quarter (through January 8, 2010)
|
$
|
.22
|
$
|
.22
|
||||
Fiscal
Year 2009
|
||||||||
1st
Quarter
|
$
|
1.04
|
$
|
.65
|
||||
2nd
Quarter
|
$
|
.95
|
$
|
.25
|
||||
3rd
Quarter
|
$
|
.89
|
$
|
.31
|
||||
4th
Quarter
|
$
|
2.00
|
$
|
.40
|
||||
Fiscal
Year Ended September 30, 2008
|
|
|||||||
1st
Quarter
|
$
|
3.15
|
|
$
|
1.01
|
|||
2nd
Quarter
|
$
|
3.65
|
$
|
1.01
|
||||
3rd
Quarter
|
$
|
2.05
|
$
|
.52
|
||||
4th
Quarter
|
$
|
2.50
|
$
|
.51
|
On
January 5, 2010 the last reported sale price of our common stock on the
Over-The-Counter Bulletin Board was $0.24 per share.
Holders
of Record
As of
December 21, 2009, there were approximately 263 holders of record of our common
stock. Equity 11 will hold 20,624,538 shares of our common stock if
it converts all of its preferred shares, warrants and stock options into common
shares. We have agreed to register certain of Equity 11’s converted
common shares under the registration statement of which this prospectus is a
part, pursuant to our Securities Purchase Agreement and Convertible
Preferred Securities Agreement with Equity 11. The sale of the
4,340,000 shares held by Equity 11 could have a material negative effect on the
price of our common stock.
Dividends
To date,
we have paid no cash dividends on our shares of common stock and we do not
expect to pay cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to provide funds
for the operation of our business. Our Securities Purchase Agreement
with Equity 11 prevents the payment of any dividends to our common stockholders
without the prior approval of Equity 11. We have paid dividends due
Equity 11 for its preferred shares by issuing additional preferred shares in
lieu of cash.
SEC
Reports
We are an
SEC reporting company and are current in filing our quarterly, annual and other
reports with the SEC. On January 30, 2009, we voluntarily sent all
shareholders our FY 2008 10-KSB filed with the SEC on December 23, 2008 as our
FY 2008 annual report. A cover letter from our CEO accompanied the
10-KSB and was filed with the SEC on January 30, 2009. The public may
read and copy materials we have filed with the SEC at the SEC's Public Reference
Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information we have filed
electronically with the SEC and these may be accessed at http://www.sec.gov. These filings
may also be accessed at our website: www.EcologyCoatings.com.
16
Equity Compensation
Plans
The
following table sets forth certain information as of December 21, 2009,
concerning outstanding options and rights to purchase common stock granted to
participants in all of our equity compensation plans and the number of shares of
common stock remaining available for issuance under such equity compensation
plans.
Number
of Securities
|
|||||||
Remaining
Available for
|
|||||||
Number
of Securities to be
|
Future
Issuance Under Equity
|
||||||
Issued
Upon Exercise of
|
Weighted-Average
Exercise
|
Compensation
Plans
|
|||||
Outstanding
Options,
Warrants
|
Price
of Outstanding Options,
|
(Excluding
Securities
|
|||||
and
Rights
|
Warrants
and Rights
|
Reflected
in Column (a))
|
|||||
Plan
Category
|
(a)
|
(b)
|
(c)
|
||||
Equity
compensation plans approved by security holders
|
4,500,000
|
$1.22
|
-
|
||||
Equity
compensation plans not approved by security holders
|
631,119
|
.51
|
368,881
|
||||
Total:
|
5,131,119
|
$1.13
|
368,881
|
ITEM
6: DILUTION
Not
applicable.
ITEM
7: SELLING SECURITY HOLDER
The table
below sets forth information concerning beneficial ownership of our common stock
as of December 31, 2009, and as adjusted to reflect the shares of common stock
to be issued and sold in this offering by:
·
|
each
person known by us to be the beneficial owner of more than 5% of our
common stock;
|
·
|
each
of our directors;
|
·
|
each
of our named executive officers;
and
|
·
|
all
of executive officers and directors as a
group.
|
The
selling stockholder acquired our securities pursuant to private placements of
our shares.
As of
December 31, 2009, we had 55,488,119 1shares of common stock beneficially
outstanding, including 32,910,684 common shares issued and outstanding, 2,497
shares of convertible preferred stock which can be converted into 4,994,000
common shares, 1,016 shares of convertible preferred stock, Series B which can
be converted into 9,525,799 common shares, warrants to acquire 4,532,900 common
shares and stock options vested or that will vest within sixty days of December
31, 2009 to acquire 3,525,119 common shares. The percentage of beneficial
ownership is based on shares of common stock beneficially outstanding as of
December 31, 2009 and 55,488,119 shares of common stock outstanding after
completion of this offering.
17
Of
the 32,910,684 common shares issued and outstanding on December 31, 2009,
18,907,300 were held by affiliates and 14,003,384 were held by non-affiliates as
shown in the table below. For purposes of the foregoing, we have
treated all shares held by executive officers, directors and Equity 11 as
“affiliate” shares.
Issued and Outstanding Shares Held Prior To
Offering
|
Issued and Outstanding Shares Held After The
Offering
|
|||
Affiliate
|
Shares
|
Percentage
|
Shares
|
Percentage
|
Equity
11/JB Smith
|
5,200,000
|
15.8%
|
5,200,000
|
15.8%
|
Richard
Stromback
|
10,697,300
|
32.6%
|
10,697,300
|
32.6%
|
Sally
Ramsey
|
3,000,000
|
9.1%
|
3,000,000
|
9.1%
|
Rocco
DelMonaco
|
-
|
-
|
-
|
-
|
Joe
Nirta
|
-
|
-
|
-
|
-
|
Robert
Crockett
|
-
|
-
|
-
|
-
|
Daniel
Iannotti
|
-
|
-
|
-
|
-
|
Tom
Krotine
|
10,000
|
*
|
10,000
|
*
|
Kevin
Stolz
|
-
|
-
|
-
|
-
|
Affiliate
Total:
|
18,907,300
|
57.4%
|
18,907,300
|
57.4%
|
Non-Affiliates:
|
14,003,384
|
42.6%
|
14,003,384
|
42.6%
|
* Less
than 1%.
Of the
55,488,119 common shares beneficially outstanding as of December 31, 2009,
35,057,716 were held by affiliates and 20,430,786 were held by non-affiliates as
shown in the table below. For purposes of the foregoing, we have
treated all shares held by executive officers, directors and Equity 11 as
“affiliate” shares. Beneficial ownership in this table is determined
in accordance with the rules of the SEC and does necessarily indicate beneficial
ownership for any other purpose. Under these rules, the number of
shares of common stock deemed outstanding includes shares issuable upon exercise
of options, warrants or convertible securities held by the respective person or
group that may be exercised within 60 days after December 31, 2009.
Beneficially Held Shares Outstanding Prior To
Offering
|
Beneficially Held Shares Outstanding After The
Offering
|
|||
Affiliate
|
Shares
|
Percentage
|
Shares
|
Percentage
|
Equity
11/JB Smith
|
19,728,370
|
35.5%
|
15,388,370
|
27.7%
|
Richard
Stromback
|
11,293,129
|
20.3%
|
11,293,129
|
20.3%
|
Sally
Ramsey
|
3,150,000
|
5.7%
|
3,150,000
|
5.7%
|
Rocco
DelMonaco
|
100,000
|
*
|
100,000
|
*
|
Joe
Nirta
|
100,000
|
*
|
100,000
|
*
|
Robert
Crockett
|
110,000
|
*
|
110,000
|
*
|
Daniel
Iannotti
|
110,000
|
*
|
110,000
|
*
|
Tom
Krotine
|
341,217
|
*
|
341,217
|
*
|
Kevin
Stolz
|
125,000
|
*
|
100,000
|
*
|
Affiliate
Total:
|
35,057,716
|
63.1%
|
30,717,716
|
55.3%
|
Non-Affiliates:
|
20,430,786
|
36.9%
|
24,770,786
|
44.7%
|
* Less
than 1%.
Unless
otherwise indicated and subject to applicable community property laws, to our
knowledge, each stockholder named in the following table possesses sole voting
and investment power over the shares listed, except for those jointly owned with
that person’s spouse. Unless otherwise noted below, the address of
each person listed on the table is c/o Ecology Coatings, Inc., 2701 Cambridge
Court, Suite 100, Auburn Hills, MI 48326. Beneficial
ownership representing less than 1% is denoted with an asterisk
(*).
18
As of
December 31, 2009, Equity 11 and our Directors and Officers currently hold the
following number of our common shares and warrants:
Name
and Address of Beneficial Owner
|
Shares
Beneficially Owned Prior to the Offering
|
Number
of Shares Offered
|
Shares
Beneficially Owned After the Offering
|
||
Shares
|
Percentage
|
Shares
|
Percentage
|
||
10
% Stockholders:
|
|||||
Equity
11, Ltd. (1)
|
19,728,370
|
35.5%
|
4,340,000
|
15,388,370
|
27.7%
|
Richard
Stromback (2)
|
11,293,129
|
20.3%
|
—
|
11,293,129
|
20.3%
|
Named
Executive Officers and Directors:
|
|||||
Richard
Stromback (2)
|
11,293,129
|
20.3%
|
—
|
11,293,129
|
20.3%
|
Sally
Ramsey
|
3,150,000
|
5.7%
|
—
|
3,150,000
|
5.7%
|
Rocco
DelMonaco
|
100,000
|
*
|
—
|
100,000
|
*
|
Joseph
Nirta
|
100,000
|
*
|
—
|
100,000
|
*
|
Robert
Crockett
|
110,000
|
*
|
—
|
110,000
|
*
|
Thomas
Krotine (3)
|
341,217
|
*
|
—
|
341,217
|
*
|
Daniel
Iannotti
|
110,000
|
*
|
—
|
110,000
|
*
|
Kevin
Stolz (6)
|
125,000
|
*
|
*
|
125,000
|
*
|
J.B.
Smith (4)
|
19,728,370
|
35,5%
|
4,340,000
|
15,388,370
|
27.7%
|
Others:
|
|||||
Trimax,
LLC (5)
|
3,050,000
|
5.5%
|
—
|
3,050,000
|
5.5%
|
All
executive officers and directors as a group (nine people):
|
35,057,716
|
63.2%
|
4,340,000
|
30,717,716
|
55.3%
|
(1) Includes
warrants to acquire 1,178,500 shares, 945,000 shares issuable upon the exercise
of options exercisable within 60 days of September 30, 2009, and 9,299,778
shares issuable upon conversion of 5% preferred stock convertible within 60 days
of September 30, 2009. These amounts include stock options to
purchase 531,000 shares held by Sales Attack LC and stock options to purchase
100,000 shares held by JB Smith. Mr. J.B. Smith is the Managing
Partner of Equity 11, Ltd. and may be deemed to share voting and dispositive
power over the shares held by Equity 11, Ltd and options held by Sales Attack
LC. Mr. Smith disclaims beneficial ownership of shares held by Equity
11, Ltd., except to the extent of any pecuniary interest therein. Mr.
Smith is the managing partner of Sales Attack LC. Sales Attack LC
provides marketing services to us pursuant to a Consulting Agreement entered
into on September 17, 2008. The selling shareholder and Mr. Smith are
not broker-dealers nor affiliates of broker-dealers.
(2) Includes
62,500 shares owned beneficially and of record by his wife, Jill Stromback, but
does not include 4,340,000 shares held by Mr. Stromback’s brother and sister,
Doug and Deanna Stromback. Includes 10,000 shares issuable upon the
exercise of options exercisable within 60 days of September 30, 2009 and also
includes 571,428 common shares convertible from 240 convertible preferred shares
purchased by Stromback Acquisition Corporation and warrants to purchase 14,400
common shares issued in connection with that purchase.
(3) Includes
331,217 shares issuable upon the exercise of options exercisable within 60 days
of September 30, 2009.
(4) Includes
100,000 shares issuable upon the exercise of options exercisable within 60 days
of September 30, 2009. Mr. Smith is the Managing Partner of Equity
11, Ltd. and may be deemed to share voting and dispositive power over the shares
held by Equity 11, Ltd. and options held by Sales Attack LC. Mr.
Smith disclaims beneficial ownership of shares held by Equity 11, Ltd., except
to the extent of any pecuniary interest therein.
19
(5) Represents
shares issuable upon the exercise of stock options and
warrants. Although our records from September 2008 indicate that
Trimax, LLC directly owned 762,939 common shares, we have been unable to confirm
that Trimax continues to own such shares. If Trimax continues to own
such common shares, the beneficial ownership number shown in this table could be
as high as 3,812,939. Daryl Repokis holds voting and dispositive
control over the shares, stock options and warrants held by Trimax,
LLC. Mr. Repokis’s address is: 220 Cranbrook, Bloomfield
Hills, MI 48304.
(6) Includes
50,000 shares issuable upon the exercise of options exercisable within 60 days
of December 21, 2009.
INFORMATION
REGARDING SHARES ISSUED TO EQUITY 11
The
following table identifies the investment amounts, number of preferred shares
purchased , number of common shares to be issued if the preferred shares are
converted and the weighted average cost per share of the shares held by the
selling shareholder, and purchased under the August 28, 2008 Securities Purchase
Agreement and the May 15, 2009 Convertible Preferred Securities Purchase
Agreement:
20
Sales Under Securities Purchase Agreement Date
August 28, 2008:
|
|||||
Preferred Shares Selling
Date
|
Amount Sold
|
No. of Preferred Shares
|
Conversion Price - Cost Per
Share
|
No. of Common Shares When
Converted
|
Market Price Per Share on Date of
Sale
|
August
28, 2008
|
$1,260,000
|
1,260
|
$.50
|
2,520,000
|
$.62
|
September
26, 2008
|
$750,000
|
750
|
$.50
|
1,500,000
|
$1.10
|
December
1, 2008 Dividend
|
24
|
$.50
|
48,000
|
||
January
23, 2009
|
$94,000
|
94
|
$.50
|
188,000
(1)
|
$.90
(1)
|
February
11, 2009
|
$30,000
|
30
|
$.50
|
60,000
|
$.65
|
February
18, 2009
|
$25,000
|
25
|
$.50
|
50,000
|
$.48
|
February
26, 2009
|
$40,000
|
40
|
$.50
|
80,000
(2)
|
$.55
(2)
|
March
10, 2009
|
$23,000
|
23
|
$.50
|
46,000
|
$.88
|
March
26, 2009
|
$80,000
|
80
|
$.50
|
160,000
|
$.60 (3)
|
April
14, 2009
|
$21,000
|
21
|
$.50
|
42,000
|
$.65
|
April
29, 2009
|
$34,000
|
34
|
$.50
|
68,000
|
$.35
|
June
1, 2009 Dividend
|
55
|
110,000
|
$.45
|
||
December
1, 2009 Dividend
|
61
|
122,000
|
$.35
|
||
Sales Under Securities Purchase Agreement Date May
15, 2009:
|
|||||
May
15, 2009
|
$276,000
|
276
|
$.08
|
3,450,000
|
$.40
|
May
27, 2009
|
$40,000
|
40
|
$.09
|
444,444
|
$.50
|
June
10, 2009
|
$20,000
|
20
|
$.09
|
222,222
|
$.45
|
June
26, 2009
|
$28,000
|
28
|
$.09
|
311,111
|
$.55
|
July
24, 2009
|
$75,000
|
75
|
$.10
|
750,000
|
$.64
|
August
12, 2009
|
$52,000
|
52
|
$.16
|
325,000
|
$.70
|
August
19, 2009
|
$25,000
|
25
|
$.24
|
104,167
|
$1.30
|
August
31, 2009
|
$50,000
|
50
|
$.26
|
192,308
|
$.96
|
November
9, 2009
|
$50,000
|
50
|
$.07
|
714,286
|
$.32
|
December
1, 2009 Dividend
|
14
|
175,000
|
$.35
|
||
December
4, 2009
|
$65,000
|
65
|
$.08
|
812,500
|
$.36
|
December
16, 2009
|
$31,000
|
31
|
$.05
|
606,000
|
$.25
|
December
31, 2009
|
$50,000
|
50
|
$.06
|
833,333
|
$.25
(4)
|
TOTAL:
|
$3,119,000
|
3,273
|
13,948,371
|
||
(1)
|
No
shares were traded on January 23, 2009. The closest previous
day that the shares were traded was on January 15, 2009 and the closing
price on that date was $.90 per
share.
|
(2)
|
No
shares were traded on February 26, 2009. The closest previous
day that the shares were traded was on February 19, 2009 and the closing
price on that date was $.55 per
share.
|
(3)
|
No
shares were traded on March 26, 2009. The closest previous day
that the shares were traded was on March 25, 2009 and the closing price on
that date was $.60 per share.
|
(4)
|
No
shares were traded on December 30, 2009. The closest previous
day that the shares were traded was on December 29, 2009 and the closing
price on that date was $.25 per
share.
|
The
following table identifies the dollar value of the selling shareholder’s
investment in the shares of preferred stock to be converted into common shares
which are being registered under this registration statement and the market
value of those shares of common stock on the date of each
investment:
Preferred Shares Selling
Date
|
Selling Shareholder’s
Investment
|
No. of Preferred Shares
|
Conversion Price Per Share
|
No. of Common Shares When
Converted
|
Market Price Per Share on Date of
Investment
|
Market Value of
Investment
|
August
28, 2008
|
$1,260,000
|
1,260
|
$.50
|
2,520,000
|
$.62
|
$1,562,400
|
September
26, 2008
|
$750,000
|
750
|
$.50
|
1,500,000
|
$1.10
|
$1,650,000
|
December
1, 2008 Dividend
|
24
|
$.50
|
48,000
|
$.75
|
$36,000
|
|
January
23, 2009
|
$94,000
|
94
|
$.50
|
188,000
|
$.90 (1)
|
$169,200
|
February
11, 2009
|
$30,000
|
30
|
$.50
|
60,000
|
$.65
|
$39,000
|
February
18, 2009
|
$12,000
|
12
|
$.50
|
24,000
|
$.48
|
$11,520
|
TOTAL:
|
$2,146,000
|
2,170
|
$.50.
|
4,340,000
|
$3,468,120
|
|
(1)
|
No
shares were traded on January 23, 2009. The closest previous
day that shares were traded was January 15, 2009 and the closing price on
that date was $.90 per share.
|
(2)
|
No
shares were traded on February 26, 2009. The closest previous
day that shares were traded was February 19, 2009 and the closing price on
that date was $.55 per share.
|
(3)
|
No
shares were traded on March 26, 2009. The closest previous day
that shares were traded was January 15, 2009 and the closing price on that
date was $.60 per share.
|
21
We will
not receive any of the proceeds from sales by selling shareholder of the common
shares under this registration statement. The only payments we
anticipate making to the selling shareholder within one year of the sales of
such stock by the selling shareholder are noted on pages 60-62 in Item
11. However, if Equity 11 and its affiliates exercise all of its
outstanding warrants and stock options, we will receive $1,546,425.
The total
possible profit the selling shareholder could realize as a result of the
conversion discount for the common shares that are included under this
registration statement is shown below:
22
Preferred Shares Selling
Date
|
Selling Shareholder’s
Investment
|
No. of Preferred Shares
|
Conversion Price Per Share
|
Total Additional Cost to Convert to Common
Shares
|
No. of Common Shares When
Converted
|
Market Price Per Share on Date of
Sale
|
Market Price of Investment
|
Potential Profit/Discount to Market
Price
|
August
28, 2008
|
$1,260,000
|
1,260
|
$.50
|
$0
|
2,520,000
|
$.62
|
$1,562,400
|
$302,400
|
September
26, 2008
|
$750,000
|
750
|
$.50
|
$0
|
1,500,000
|
$1.10
|
$1,650,000
|
$900,000
|
December
1, 2008 Dividend
|
24
|
$.50
|
$0
|
48,000
|
$.75
|
$36,000
|
$36,000
|
|
January
23, 2009
|
$94,000
|
94
|
$.50
|
$0
|
188,000
|
$.90
(1)
|
$169,200
|
$75,200
|
February
11, 2009
|
$30,000
|
30
|
$.50
|
$0
|
60,000
|
$.65
|
$39,000
|
$9,000
|
February
18, 2009
|
$12,000
|
12
|
$.50
|
$0
|
24,000
|
$.48
|
$11,520
|
($480)
|
TOTAL:
|
$2,146,000
|
2,170
|
$.50
|
$0
|
4,340,000
|
$3,468,120
|
$1,322,120
|
|
(1)
|
No
shares were traded on January 23, 2009. The closest previous
day that shares were traded was January 15, 2009 and the closing price on
that date was $.90 per share.
|
(2)
|
No
shares were traded on February 26, 2009. The closest previous
day that shares were traded was February 19, 2009 and the closing price on
that date was $.55 per share.
|
(3)
|
No
shares were traded on March 26, 2009. The closest previous day
that shares were traded was January 15, 2009 and the closing price on that
date was $.60 per share.
|
The total
possible profit the selling shareholder could realize as a result of the
warrants issued to the selling shareholder under the August 28, 2008 Securities
Purchase Agreement is shown below:
Warrant Issue Date
|
Selling Shareholder’s
Investment
|
No. of Shares
|
Purchase Price Per Share
|
Total Purchase Price of
Warrant
|
Market Price Per Share on Warrant Issue
Date
|
Market Value of Warrant
|
Potential Profit/Discount to Market
Price
|
August
28, 2008
|
$0
(1)
|
630,000
|
$.75
|
$472,500
|
$.62
|
$390,600
|
($81,900)
|
September
26, 2008
|
$0
(1)
|
375,000
|
$.75
|
$281,250
|
$1.10
|
$412,500
|
$131,250
|
January
23, 2009
|
$0
(1)
|
47,000
|
$.75
|
$35,250
|
$.90
(2)
|
$42,300
|
$7,050
|
February
11, 2009
|
$0
(1)
|
15,000
|
$.75
|
$11,250
|
$.65
|
$9,750
|
($1,500)
|
February
18, 2009
|
$0
(1)
|
12,500
|
$.75
|
$9,375
|
$.48
|
$6,000
|
($3,375)
|
February
26, 2009
|
$0
(1)
|
20,000
|
$.75
|
$15,000
|
$.55
(3)
|
$11,000
|
($4,000)
|
March
10, 2009
|
$0
(1)
|
11,500
|
$.75
|
$8,625
|
$.88
|
$10,120
|
$1,495
|
March
26, 2009
|
$0
(1)
|
40,000
|
$.75
|
$30,000
|
$.60
(4)
|
$24,000
|
($6,000)
|
April
14, 2009
|
$0
(1)
|
10,750
|
$.75
|
$8,062
|
$.65
|
$6,987
|
($1,075)
|
April
29, 2009
|
$0
(1)
|
16,750
|
$.75
|
$12,563
|
$.35
|
$5,863
|
($6,700)
|
TOTAL:
|
1,178,500
|
$883,875
|
$919,120
|
$35,245
|
|||
(1)
|
These
warrants were issued with each investment by Equity 11 in shares of
preferred stock under the Securities Purchase Agreement dated August 28,
2008.
|
(2)
|
No
shares were traded on January 23, 2009. The closest previous
day that the shares were traded was on January 15, 2009 and the closing
price on that date was $.90 per
share.
|
(3)
|
No
shares were traded on February 26, 2009. The closest previous
day that the shares were traded was on February 19, 2009 and the closing
price on that date was $.55 per
share.
|
(4)
|
No
shares were traded on March 26, 2009. The closest previous day
that the shares were traded was on March 25, 2009 and the closing price on
that date was $.60 per share.
|
The
following table identifies the total payments to the selling shareholder and the
total discount to the market price of the common shares and warrants to be
issued to the selling shareholder as a percentage of the net proceeds to
us:
Gross Proceeds from Sale of Preferred
Stock
|
Payments Previously Made to Selling
Shareholder(1)
|
Remaining Required Payments to be made to Selling
Shareholder (1)
|
Net Proceeds to Issuer
|
Total Discount to Market By Selling Shareholder
for common stock and warrants
|
Total Payments to Selling Shareholder as a
Percentage of Gross Proceeds
|
Total Discount to Market Price as a Percentage of
Gross Proceeds
|
$2,146,000
|
$299,603.72
|
$426,752.70
|
$1,419,643.60
|
$1,357,365
|
34%
|
63%
|
(1)
|
See
pages 60-62 in Item 11 for the calculation of these
figures.
|
23
The
following table identifies the total combined possible profit to be realized by
the selling shareholder as a result of any conversion discounts regarding the
common shares underlying the preferred stock and any other warrants, options,
notes, or other securities held by selling shareholder and its
affiliates:
Total Combined Profit Common
Shares
|
Total Combined Profit
Warrants
|
Total Combined Profit
Options
|
Total Combined Profit Notes
|
Total Combined Profit
|
$1,322,120
|
$35,245
|
$0
(1)
|
$1,093
(2)
|
$1,358,458
|
(1)
|
531,000
stock options were issued to Sales Attack, LLC, an affiliate of the
selling shareholder, on September 17, 2008 to purchase our common stock at
$1.05 per share. The closing price of our common stock on the
OTC Bulletin Board on that date was $1.05 per share. The
selling shareholder acquired stock options to purchase 500,000 shares of
our common stock at $.90 per share on January 23, 2009. No
shares of our stock traded on January 23, 2009 and next closest trading
date was January 15, 2009 on which the closing price of our common stock
was $.90 per share.
|
(2)
|
This
amount reflects interest paid or accrued for promissory notes held by
affiliates of the selling shareholder (Seven Industries, JB Smith LC, and
Sky Blue Ventures).
|
The
following table identifies the total of all possible payments by us to the
selling shareholder, the total possible discount to the market price of the
shares underlying the preferred stock and the total possible discount to the
market price of the warrants issued to the selling shareholder as a percentage
of the net proceeds to use from the sale of preferred stock to selling
shareholder:
Total of Possible Payments to Selling
Shareholder
|
Total Possible Payments As a % of Net
Proceeds
|
Total Possible Discount Common
Shares
|
Total Possible Discount Common Shares As a % of
Net Proceeds
|
Total Possible Discount
Warrants
|
Total Possible Discount Warrants As a % of Net
Proceeds
|
Total of Payments &
Discounts
|
Total As a % of Net
Proceeds
|
$726,366.42
(1)
|
60%
|
$1,322,120
|
95%
|
$35,245
|
2.5%
|
$2,083,373.40
|
147%
|
(1)
|
Represents
$299,603.72 in payments previously made and $426,752.70 in payments
remaining to be paid. See pages 63-65 in Item 11 for the
calculation of these figures. This includes prior payments to
the selling shareholder or its affiliates and all future payments to be
made to the selling shareholder.
|
The
following identifies the number of shares outstanding prior to the selling
shareholder’s initial investment in us and information regarding the
registration of such shares:
# of shares outstanding prior to Selling
Shareholder’s initial investment
|
# of shares registered for resale by selling
shareholder in prior registration statements
|
# of shares registered for resale by selling
shareholder that continue to held by Selling
Shareholder
|
# of shares sold in registered resale transactions
by Selling Shareholder
|
# of shares registered for resale on behalf of
Selling Shareholder
|
32,910,684
|
0
|
4,340,000
|
0
|
4,340,000
|
24
ITEM
8: PLAN OF DISTRIBUTION
Equity
11, as the selling shareholder of the common stock hereunder and any of its
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of the shares of common stock subject to the prospectus on the
Over-The-Counter Bulletin Board, market or trading facility on which the shares
are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholder may use one or more of the
following methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
·
|
privately
negotiated transactions;
|
·
|
broker-dealers
may agree with the selling shareholder to sell a specified number of such
shares at a stipulated price per share;
or
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling shareholder may also sell shares under Rule 144 under the Securities Act
of 1933, as amended (the “Securities Act”), if
available, rather than under this prospectus. So long as the selling
shareholder is an affiliate of Ecology Coatings, as defined under applicable SEC
rules, under Rule 144, the selling shareholder may not sell in any three month
period a number of shares which exceeds the greater of: i) one
percent of the outstanding shares shown in our most recent SEC report or
statement, or ii) the average weekly reported volume of trading in our common
stock as reported by the Over-The-Counter Bulletin Board association during the
four calendar weeks preceding prior to the notice of the Rule 144
sale. The selling shareholder is currently an affiliate of Ecology
Coatings, Inc. within the meaning of federal securities laws. In the
event that the selling shareholder is not deemed to have been an "affiliate" at
any time during the 90 days preceding a sale and has beneficially owned the
shares proposed to be sold for at least six months, the selling shareholder
would be entitled to sell those shares under Rule 144 subject to compliance with
the current public information requirements of Rule 144. If such
selling shareholder has beneficially owned the shares proposed to be sold for at
least one year, then the selling shareholder is entitled to sell those shares
without complying with any of the requirements of Rule 144 so long as we
are current in our public information requirements under Rule 144
(c).
Broker-dealers
engaged by the selling shareholder may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or
discounts from the selling shareholder (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this Prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in
compliance with applicable FINRA rules.
Although
there are no contractual or other arrangements that prohibit the selling
shareholder from engaging in short selling, the selling shareholder has informed
us that it has not held a short position in our common stock, does not currently
hold a short position in our common stock and that does not intend to engage in
any short selling in our shares. Short selling is the practice of
selling securities that have been borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. The
short seller hopes to profit from a decline in the value of the securities
between the sale and the repurchase, as he will pay less to buy the securities
than he received on selling them. Conversely, the short seller will make a loss
if the price of the security rises. The ability of the Selling
Shareholder to sell a substantial number of shares and the downward pressure on
the price of our common stock that may result may encourage short selling of our
common stock by third parties. Such short selling will cause
additional downward pressure on the price of our stock.
25
We agreed
to keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the selling shareholder without registration and without
regard to any volume limitations by reason of Rule 144 under the Securities Act
or any other rule of similar effect or (ii) all of the shares have been sold
pursuant to this prospectus or Rule 144 under the Securities Act or any other
rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to the common stock for the
applicable restricted period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the selling
shareholder will be subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including Regulation M, which may limit the
timing of purchases and sales of shares of the common stock by the selling
shareholder or any other person. We will make copies of this
prospectus available to the selling shareholder and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale (including by compliance with Rule 172 under the Securities
Act).
Important Information on
Penny Stocks
Our stock
is a “penny stock”. The SEC requires your broker to give the
following statement to you, and to obtain your signature to show that you have
received it, before your first trade in a penny stock. This statement contains
important information — and you should read it carefully before you sign it, and
before you decide to purchase or sell a penny stock.
In
addition to obtaining your signature, the SEC requires your broker to wait at
least two business days after sending you this statement before executing your
first trade to give you time to carefully consider your trade.
Penny
stocks can be very risky.
Penny
stocks are low-priced shares of small companies. Penny stocks may trade
infrequently – which means that it may be difficult to sell penny stock shares
once you have them. Because it may also be difficult to find quotations for
penny stocks, they may be impossible to accurately price. Investors in penny stock
should be prepared for the possibility that they may lose their whole
investment.
While
penny stocks generally trade over-the-counter, they may also trade on U.S.
securities exchanges, facilities of U.S. exchanges, or foreign exchanges. You
should learn about the market in which the penny stock trades to determine how
much demand there is for this stock and how difficult it will be to sell. Be
especially careful if your broker is offering to sell you newly issued penny
stock that has no established trading market.
The
securities you are considering have not been approved or disapproved by the SEC.
Moreover, the SEC has not passed upon the fairness or the merits of this
transaction nor upon the accuracy or adequacy of the information contained in
any prospectus or any other information provided by an issuer or a broker or
dealer.
Information
you should get.
In
addition to this statement, your broker is required to give you a statement of
your financial situation and investment goals explaining why his or her firm has
determined that penny stocks are a suitable investment for you. In addition,
your broker is required to obtain your agreement to the proposed penny stock
transaction.
26
Before you buy
penny stock, federal law requires your salesperson to tell you the “offer”
and the “bid”
on the stock, and the “compensation”
the salesperson and the firm receive for the trade. The firm also must send a
confirmation of these prices to you after the trade. You will need this price
information to determine what profit or loss, if any, you will have when you
sell your stock.
The offer
price is the wholesale price at which the dealer is willing to sell stock to
other dealers. The bid price is the wholesale price at which the dealer is
willing to buy the stock from other dealers. In its trade with you, the dealer
may add a retail charge to these wholesale prices as compensation (called a
“markup” or “markdown”).
The
difference between the bid and the offer price is the dealer’s “spread.”
A spread that is large compared with the purchase price can make a resale of a
stock very costly. To be profitable when you sell, the bid price of your stock
must rise above the amount of this spread and
the compensation charged by both your selling and purchasing dealers. Remember
that if the dealer has no bid price, you may not be able to sell the stock after
you buy it, and may lose your whole investment.
After you buy
penny stock, your brokerage firm must send you a monthly account
statement that gives an estimate of the value of each penny stock in your
account, if there is enough information to make an estimate. If the firm has not
bought or sold any penny stocks for your account for six months, it can provide
these statements every three months.
Additional
information about low-priced securities – including penny stocks – is available
on the SEC’s Web site at http://www.sec.gov/investor/pubs/microcapstock.htm.
In addition, your broker will send you a copy of this information upon request.
The SEC encourages you to learn all you can before making this
investment.
Brokers’
duties and customer’s rights and remedies.
Remember
that your salesperson is not an impartial advisor – he or she is being paid to
sell you stock. Do not rely only on the salesperson, but seek outside advice
before you buy any stock. You can get the disciplinary history of a salesperson
or firm from FINRA at 1-800-289-9999 or contact FINRA via the Internet at www.finra.org. You
can also get additional information from your state securities official. The
North American Securities Administrators Association, Inc. can give you contact
information for your state. You can reach NASAA at (202) 737-0900 or via the
Internet at www.nasaa.org.
If you have problems with a
salesperson, contact the firm’s compliance officer. You can also contact the
securities regulators listed above. Finally, if you are a victim of fraud, you
may have rights and remedies under state and federal law. In addition to the
regulators listed above, you also may contact the SEC with complaints at (800)
SEC-0330 or via the Internet at help@sec.gov.
ITEM
9: DESCRIPTION OF SECURITIES TO BE REGISTERED
Our
authorized capital stock consists of 90,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share.
Number
of Shares of Common Outstanding After This Offering
Holders
of our common stock are entitled to one vote for each share of common stock held
of record for the election of directors and on all matters submitted to a vote
of stockholders. Holders of our common stock are entitled to receive ratably any
dividends that are declared by our board of directors out of legally available
funds, subject to any preferential dividend rights of any preferred stock then
outstanding. Upon our dissolution, liquidation or winding up, holders of our
common stock are entitled to share ratably in our net assets legally available
after the payment of all our debts and other liabilities, subject to the
preferential rights of any preferred stock then outstanding. Holders of our
common stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the
future.
27
As of
December 31, 2009, we had 55,488,502 shares of common stock beneficially
outstanding, including 32,910,684 common shares issued and outstanding, 2,497
shares of convertible preferred stock which can be converted into 4,994,000
common shares, 1,016 shares of convertible preferred stock, Series B which can
be converted into 9,525,799 common shares, warrants to acquire 4,532,900 common
shares and stock options vested or that will vest within sixty days of December
31, 2009 to acquire 3,525,119 common shares. Of the 55,488,502 shares
beneficially outstanding, 35,057,716 were held by affiliates and 20,430,786 were
held by non-affiliates. For purposes of the foregoing, we have treated all
shares held by executive officers, directors and Equity 11 as “affiliate”
shares.
As of
December 31, 2009, 32,910,684 shares of our common stock were issued and
outstanding. The number of shares of common stock outstanding after
this offering will be 37,250,684, including common shares that are converted
from certain preferred shares held by the selling shareholder. The
number of issuable shares of common stock issuable upon the exercise of options
and warrants that are not vested and will not vest by March 1, 2010 is
1,901,000.
We have
four notes which are currently due identified in the table below which initially
had the potential to convert to common stock. Because we did not
engage in a publicly underwritten new offering of our common stock that raised
$1,000,000 or more by the maturity dates of these notes, these notes no longer
have the ability to convert to our common stock:
Note Holder
|
Amounts Owing on December 31,
2009
|
Investment
Hunter, LLC
|
$380,841
|
Mitch
Shaheen I
|
$211,348
|
Mitch
Shaheen II
|
$143,012
|
George
Resta
|
$51,008
|
Total:
|
$786,209
|
All of
these notes are in default. Although these outstanding promissory
notes were initially convertible into our common stock, the right to convert was
extinguished because we did not complete an underwritten public or private stock
offering in which we netted $1,000,000 or more by the maturity dates of the
notes. However, we are in discussions with these note holders and we
may allow some or all of these notes to convert into our common stock as a
method to conserve our cash.
In
addition, we have the following outstanding promissory notes which are not
currently due:
Note Holder
|
Amounts Owing on December 31,
2009
|
Richard
Stromback
|
$2,584
(1)
|
Doug
Stromback
|
$150,442
|
Deanna
Stromback
|
$124,986
|
JB
Smith LC
|
$7,911
|
Sky
Blue Ventures
|
$6,600
|
JB
Smith LC II
|
$3,615
|
(1)
|
This
note is no longer outstanding. This amount represents interest
previously due but that has not yet been
paid.
|
For
information regarding the dividend rights and dividend payment history of our
common stock, see Item 7 of this prospectus.
28
Preferred
Stock
On August
28, 2008, we entered into a Securities Purchase Agreement (“Securities Purchase
Agreement”) with Equity 11, Ltd. (“Equity 11”) to issue up to $5,000,000 in
convertible preferred securities. The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at fixed price of
$.50 per share. The preferred securities carry “as converted” voting
rights. As of December 31, 2009, we had issued 2,497 of these convertible
preferred shares and warrants to acquire 1,178,500 common shares at $.75 per
share. When we sold additional convertible preferred securities under
the Securities Purchase Agreement, we issued attached warrants (500 warrants for
each $1,000 convertible preferred share sold). The warrants are
immediately exercisable, expire in five years, and entitle the investor to
purchase one share of our common stock at $.75 per share for each warrant
issued. Equity 11 will convert 2,170 shares of convertible preferred
securities into an aggregate of 4,340,000 shares of our common stock in
connection with this offering. If all of the convertible preferred
shares are converted into common stock and all warrants are exercised under the
Securities Purchase Agreement, Equity 11 will have acquired a total of 6,172,500
common shares pursuant to this Agreement. Under Section 5.8 of the
Securities Purchase Agreement with Equity 11, we have agreed to file a
registration statement with the SEC (of which the prospectus is a part) with
respect to our shares of common stock held by Equity 11. Until August
28, 2011, the Securities Purchase Agreement allows Equity 11 to elect three of
the five members of our Board of Directors for a period of three
years. In addition, so long as Equity 11 retains at least 1,260
convertible preferred shares issued under the Securities Purchase Agreement,
Equity 11 will have the right to appoint our Chief Executive
Officer. We were unable to pay the cash dividends due on
December 1, 2008, June 1, 2009 and December 1, 2009 for preferred shares
purchased under the Securities Purchase Agreement and, as is permitted under the
Agreement, we issued additional preferred shares in lieu of cash. Our
ability to pay future dividends on preferred shares held by Equity 11 is
dependent on our ability to generate revenue and/or raise additional capital
from Equity 11 or others.
On May
15, 2009, we entered into a Convertible Preferred Securities Agreement (the
“Preferred Securities Agreement”) with Equity 11 for the issuance and sale of
5.0% Cumulative Convertible Preferred Shares, Series B of the Company at a
purchase price of $1,000 per share. Equity 11 may convert the
Convertible Preferred Shares into shares of our common stock at a fixed
conversion price that is twenty percent (20%) of the average of the closing
price of our common stock on the Over-The-Counter Bulletin Board for
the five trading days prior to each investment. Under Section 5.8 of
the Preferred Securities Agreement, we have agreed to file a registration
statement with the SEC (of which the prospectus is a part) with respect to the
shares of our common stock held by Equity 11. Until May 15, 2012, the
Preferred Securities Agreement allows Equity 11 to elect three of the five
members of our Board of Directors. In addition, so long as Equity 11
retains at least 1,501 convertible preferred shares issued under the Preferred
Securities Agreement, Equity 11 will have the right to appoint our Chief
Executive Officer. We were unable to pay the cash dividend due on
June 1, 2009 and December 1, 2009 for preferred shares purchased under the
Preferred Securities Agreement and issued additional preferred shares in lieu of
cash. Our ability to pay future dividends is dependent on our ability
to generate revenue and/or raise additional capital.
The
Preferred Securities Agreement did not replace or terminate the terms of the
Securities Purchase Agreement. That is, the terms of the Securities
Purchase Agreement will continue to apply to preferred stock and warrants issued
under the Securities Purchase Agreement. Similarly, the terms of the
Preferred Securities Agreement will apply to preferred stock issued under the
Preferred Securities Agreement.
On September 30, 2009, we and Stromback
Acquisition Corporation, an Illinois corporation (the “Purchaser”), entered into
a Securities Purchase Agreement (the “Preferred Securities Agreement”) for
the issuance and sale of our 5.0% Cumulative Convertible Preferred Shares,
Series B (the “Convertible Preferred Shares”) at a purchase price of $1,000 per
share. Stromback Acquisition Corporation is owned by Richard
Stromback a former member of our Board of Directors. Until
April 1, 2010, Purchaser has the right to purchase up to 3,000 Convertible
Preferred Shares. The Convertible Preferred Shares have a liquidation
preference of $1,000 per share. Purchaser may convert the Convertible
Preferred Shares into shares of our common stock at a conversion price that is
seventy seven percent (77%) of the average closing price of our common stock on
the Over-The-Counter Bulletin Board for the five trading days prior to each
investment. The Convertible Preferred Shares will pay cumulative cash
dividends at a rate of 5% per annum, subject to declaration by our Board of
Directors, on December 1 and June 1 of each year. We have agreed to
provide piggyback registration rights for common stock converted by Purchaser
under a Registration Rights Agreement. Fifty percent (50%) of each investment,
up to a maximum of $500,000, will be placed in a fund and disbursed as directed
by Purchaser to satisfy our outstanding debts, accounts payable and/or investor
relations programs (“Discretionary Fund”). On October 1, 2009,
Stromback Acquisition Corporation acquired 240 shares of our Convertible
Preferred Shares, Series B with a purchase price per share of
$1,000. We received $240,000 of gross proceeds and net proceeds of
$120,000 after payments were made from the Discretionary Fund for outstanding
obligations owed to Mr. Stromback.
29
Our board
of directors is authorized, without further vote or action by the stockholders,
to issue from time to time up to an aggregate of 10,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, rights,
preferences and powers and any qualifications, limitations or restrictions of
the shares of each such series of preferred stock, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
that series, any or all of which may be greater than the rights of common
stock. The issuance of preferred stock could adversely affect the
voting power of holders of our common stock and the likelihood that holders of
our common stock will receive dividend payments and payments upon liquidation
and could have the effect of delaying, deferring or preventing a change in
control. Other than pursuant to the Preferred Securities Agreement,
we have no present plans to issue any shares of preferred stock.
Warrants
On August
28, 2008, we entered into the Agreement with Equity 11 to issue up to $5,000,000
in convertible preferred securities. For each share of convertible
preferred securities sold under this agreement, we will issue attached warrants
(500 warrants for each $1,000 convertible preferred share sold). The
warrants are immediately exercisable, expire in five years, and entitle Equity
11 to purchase one share of our common stock at $.75 per share for each warrant
issued. As of November 16, 2009, Equity 11 held warrants to acquire
our common stock as follows:
Exercise
|
Date
|
Expiration
|
||||
Number of Warrants
|
Price
|
Issued
|
Date
|
|||
100,000
|
$0.75
|
July
28, 2008
|
July
28, 2013
|
|||
5,000
|
$0.75
|
August
20, 2008
|
August
20, 2013
|
|||
25,000
|
$0.75
|
August
27, 2008
|
August
27, 2013
|
|||
500,000
|
$0.75
|
August
29, 2008
|
August
29, 2013
|
|||
375,000
|
$0.75
|
September
26, 2008
|
September
26, 2013
|
|||
47,000
|
$0.75
|
January
23, 2009
|
January
23, 2014
|
|||
15,000
|
$0.75
|
February
12, 2009
|
February
12, 2014
|
|||
12,500
|
$0.75
|
February
18, 2009
|
February
18, 2014
|
|||
20,000
|
$0.75
|
February
26, 2009
|
February
26, 2014
|
|||
11,500
|
$0.75
|
March
10, 2009
|
March
10, 2014
|
|||
40,000
|
$0.75
|
March
26, 2009
|
March
26, 2014
|
|||
10,750
|
$0.75
|
April
14, 2009
|
April
14, 2014
|
|||
16,750
|
$.075
|
April
29, 2009
|
April
29, 2014
|
|||
Total: 1,178,500
|
30
As of
December 31, 2009, we had the following additional warrants
outstanding:
Number of Warrants
|
Issue Date
|
Expiration Date
|
Acquisition Price per Share
|
Held By
|
500,000
|
December
18, 2006
|
December
18, 2016
|
$.90
|
Trimax,
LLC
|
2,000,000
|
November
11, 2008
|
November
11, 2018
|
$.50
|
Trimax
LLC
|
12,500
|
March
1, 2008
|
March
1, 2018
|
$1.75
|
George
Resta
|
262,500
|
February
5, 2008
|
February
5, 2018
|
$2.00
|
Hayden
Capital USA, LLC
|
125,000
|
March
1, 2008
|
March
1, 2018
|
$1.75
|
Investment
Hunter. LLC
|
210,000
|
June
9, 2008
|
June
9, 2018
|
$2.00
|
Hayden
Capital USA, LLC
|
100,000
|
June
21, 2008
|
June
21, 2018
|
$.75
|
Mitchell
Shaheen
|
100,000
|
July
14, 2008
|
July
14, 2018
|
$.50
|
Mitchell
Shaheen
|
15,000
|
July
14, 2008
|
July
14, 2018
|
$1.75
|
George
Resta
|
15,000
|
July
14, 2008
|
July
14, 2018
|
$1.75
|
Investment
Hunter, LLC
|
14,400
|
October
1, 2009
|
October
1, 2019
|
$.42
|
Stromback
Acquisition Corporation
|
Total: 3,354,400
|
Stock
Options
Stock Option
Plan. On May 9, 2007, we adopted a stock option plan and
reserved 4,500,000 shares for issuance thereunder. On December 2,
2008, our Board of Directors authorized the addition of 1,000,000 shares of our
common stock to the 2007 Plan. All prior grants of options were
included under this plan. The plan provides for incentive stock
options, nonqualified stock options, rights to restricted stock and stock
appreciation rights. Eligible recipients are employees, directors,
and consultants. Only employees are eligible for incentive stock
options. The vesting terms are set by the Board of
Directors. All options expire 10 years after
issuance.
The
Company granted non-statutory options as follows during the twelve months ended
September 30, 2009:
Weighted
Average Exercise Price Per Share
|
Number
of Options
|
Weighted
Average (Remaining) Contractual Term
|
Aggregate
Fair Value
|
|
Outstanding
as of September 30, 2008
|
$1.83
|
4,642,119
|
9.2
|
$5,011,500
|
Granted
|
$.61
|
439,000
|
9.8
|
$634,491
|
Exercised
|
$.50
|
50,000
|
---
|
$76,447
|
Forfeited
|
$2.13
|
850,000
|
7.8
|
$1,000,479
|
Outstanding
as of December 31, 2009
|
$1.13
|
5,131,119
|
8.5
|
$4,569,005
|
Exercisable
|
$1.06
|
2,925,119
|
6.7
|
$3,249,831
|
3,095,119
of the options were exercisable as of December 31, 2009. The options
are subject to various vesting periods between June 26, 2007 and
January 1, 2012. The options expire on various dates
between June 1, 2016 and January 1, 2022. Additionally, the options
had no intrinsic value as of June 30, 2009, as our stock price as of such date
was greater than the exercise price of such options.
Employee
and director stock-based compensation expense is measured utilizing the
fair-value method.
We
account for stock options granted to non-employees under the fair-value method
with stock-based compensation expense being charged to earnings on the earlier
of the date services are performed or a performance commitment
exists.
31
In
calculating the compensation related to employee/consultants and directors stock
option grants, the fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model. See Note 7 of our
Financial Statements included herein for additional information regarding our
stock option plan.
Registration
Rights
As of
December 31, 2009, we have issued stock options to purchase 5,131,119
shares. We have filed a Form S-8 registration with the SEC to
register the shares issuable upon exercise of the stock options held by
employees and individual consultants. The Form S-8 was filed with the
SEC on April 9, 2009.
On July
21, 2007, we completed a private placement of 2,000,000 common shares and
granted “piggyback” registration rights for those shares. As of
December 27, 2007, the non-affiliated holders of those shares were able to
resell those shares pursuant to SEC Rule 144.
|
Piggyback
Registration Rights
|
In
connection with our reverse merger with OCIS, we granted piggyback registration
rights to certain OCIS shareholders in a Registration Rights Agreement dated
April 30, 2007. The piggyback registration rights are in effect for
two years from the close of the reverse merger (July 21, 2007). The
parties to this Agreement – Kirk Blosch, Jeff Holmes and Brent Schlesinger –
have notified us that they do not want their shares to be included in this
registration. This registration statement does not include shares
issued to these shareholders – only shares held by the selling shareholder are
included in this registration.
Shareholders
who purchased shares of our common stock pursuant to our 2007 Private Placement
had certain registration rights. Those rights have lapsed as of the
date such stockholders were able to remove their restrictive stock legends from
their shares pursuant to Rule 144.
The
holders of certain promissory notes issued by us have piggyback registration
rights if we complete an underwritten “new offering” which would result in
proceeds of $1,000,000 or more. We did not undertake such an offering
by any of the maturity dates of these notes. If we had undertaken
such an offering, we would have paid all registration expenses, other than
underwriting discounts and commissions and any transfer taxes related to any
such piggyback registration. With respect to demand registrations, these
expenses include all reasonable expenses that any stockholder incurs in
connection with the registration of its securities, subject to certain
limitations.
Our
Certificate of Incorporation and Bylaws
Our
amended and restated certificate of incorporation and our amended and restated
bylaws do not contain certain provisions that could have the effect of delaying,
deferring or discouraging another party from acquiring control of
us.
Undesignated
Preferred Stock
As
discussed above, our board of directors has the ability to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
our company.
Limits
on Ability of Stockholders to Act by Written Consent
Our
amended and restated certificate of incorporation and bylaws do not prevent our
stockholders from acting by written consent.
32
Requirements
for Advance Notification of Stockholder Nominations and Proposals
Our
amended and restated bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a committee of our board of directors. These provisions may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed. These provisions may also discourage or
deter a potential acquirer from conducting a solicitation of proxies to elect
the acquirer’s own slate of directors or otherwise attempting to obtain control
of our company.
Election
and Removal of Directors
Our
amended and restated certificate of incorporation and amended and bylaws contain
provisions that establish specific procedures for appointing and removing
members of our board of directors.
Cumulative
Voting
Our
amended and restated certificate of incorporation and bylaws permit cumulative
voting in the election of directors. Cumulative voting allows a stockholder to
vote a portion or all of its shares for one or more candidates for seats on our
board of directors.
Transfer
Agent and Registrar
Our
transfer agent and registrar for our common stock is Colonial Stock Transfer Co,
Inc.. Its address is 66 Exchange Place, Suite 100, Salt Lake City, UT 84111, and
its telephone number is (801) 355-5740.
Listing
Our
common stock has been authorized for listing on the Over-The-Counter Bulletin
Board under the symbol “ECOC.”
ITEM
10: INTERESTS OF NAMED EXPERTS AND COUNSEL
Legal
Matters
The
validity of our common stock offered hereby will be passed upon by our General
Counsel, Daniel Iannotti, Auburn Hills, Michigan.
Experts
Our
consolidated financial statements as of and for the years ended September
30, 2009 and 2008, appearing in this prospectus have been so included in
reliance on the report of UHY LLP an independent registered public
accounting firm, given on the authority of the firm as experts in auditing and
accounting.
ITEM
11: INFORMATION WITH RESPECT TO THE REGISTRANT
DESCRIPTION
OF BUSINESS
Ecology
Coatings, Inc. (“Ecology-CA”) was originally incorporated in California on March
12, 1990. OCIS Corp. (“OCIS”) was incorporated in Nevada on
February 6, 2002. OCIS completed a merger with Ecology-CA on
July 27, 2007 (the “Merger”). In the Merger, OCIS issued
approximately 30,530,684 shares of common stock to the Ecology-CA
stockholders. In this transaction, OCIS changed its name from OCIS
Corporation to Ecology Coatings, Inc. and our ticker symbol on the OTC Bulletin
Board association changed to “ECOC.” As a result of the merger, we
became a Nevada corporation and Ecology-CA became a wholly owned
subsidiary.
33
Company
Overview
We
develop “clean tech”, nanotechnology-enabled, ultra-violet (“UV”) curable
coatings that are designed to drive efficiencies, reduce energy consumption,
create new performance characteristics and virtually eliminate pollutants in the
manufacturing sector. We create proprietary coatings with unique
performance and environmental attributes by leveraging our platform of
integrated clean technology products that reduce overall energy consumption and
offer a marked decrease in drying time.
Our
patent and intellectual property activities to date include:
|
·
|
seven
patents covering elements of our technology from the United States Patent
and Trademark Office(“USPTO”)
|
|
·
|
two
European patents allowed and nine pending patent applications in foreign
countries
|
|
·
|
one
ICT international patent
application
|
|
·
|
three
trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and
“Liquid Nanotechnology™”
|
·
|
200+
proprietary coatings formulations.
|
We
continue to work independently on developing our clean technology products
further. Our target markets include electronics, steel, construction, automotive
and trucking, paper products and original equipment manufacturers
(“OEMs”). Our business model contemplates both licensing and direct
sales strategies. We intend to license our technology to industry
leaders in our target markets, through which products will be sold to end
users. We plan to use direct sales teams and third party agents in
certain target markets, such as OEMs, and third party distributors in broad
product markets, such as paper products, to develop our product
sales.
Business
in General
We have
focused on developing products that support inexpensive mass production
utilization of protective coatings that leverage nano-particle clean technology
and are cured under UV light. We believe that the use of our “Liquid
Nanotechnology™” coatings represent a paradigm shift in coatings
technology. While our competitors have focused their efforts on
improving the industry-standard, thermal-cured powder-coat, water-borne and
solvent-based coatings, we have strived for technological
breakthroughs. We have developed over 200 individual coating
formulations that we believe address the limitations of traditional
coatings. The USPTO has issued six patents and have allowed a seventh
covering many of these formulations as well as their
application. Additionally, the formulations that are not currently
patent protected are protected as trade secrets.
Nearly
every manufactured product has a protective coating on it, whether metal,
plastic, glass or an electronic product. These coatings are important
for providing protection, such as scratch and abrasion resistance, as well as
for enabling added durability and maintenance of the overall aesthetic
appearance of the product. Coatings that use water or organic
carriers remain the standard in the large OEM coatings
market. However, the use of traditional, carrier-based coatings
continues to burden manufacturers with cost, performance, and environmental
health and safety disadvantages.
Our
Liquid Nanotechnology™ coatings are 100% solids and UV curable. They
contain almost no volatile carriers and are generally comprised of polymers that
react to UV light, all of which becomes part of the final coating bound to the
substrate. Traditional coatings, such as paint, are composed of a
solid resin and a carrier, such as an organic solvent or water, that are used to
adjust the viscosity to allow application. Thus, during the curing
process the carrier evaporates either by application of heat or air-drying, both
of which require time to complete the process. Moreover, the
evaporation of the carrier can generate environmentally harmful airborne
emissions.
34
Our
Liquid Nanotechnology™ coatings offer a number of performance and user benefits
over traditional coatings. We believe that our 100% solids, UV-cured
industrial products represent the coatings industry’s cutting edge in overall
performance, offering bottom line value and environmental advantages to users
because they:
•
|
Cure
faster, usually in seconds, not minutes;
|
||
•
|
Use
less floor space, thereby improving operating
efficiency;
|
||
•
|
Use
dramatically less energy;
|
||
•
|
Reduce
production compliance burdens with the Environmental Protection Agency
because our coatings produce fewer emissions;
|
||
•
|
Provide
improved coating and/or substrate performance; and
|
||
•
|
Boost
manufacturing productivity by increasing process
throughput.
|
Conventional Low-Tech
Coatings
Many
conventional, low-tech coatings used today require 20 or more minutes of drying
time (either air dried or forced thermal drying). In the case of air
drying, a process bottleneck can occur, causing reduced production rates. In the
case of thermally induced drying, protective coats can only be applied to
materials able to withstand certain levels of heat. This requires the
disassembly of many manufactured parts before they can be coated and further
increases the time needed for the coating process to be completed. In either
case, the manufacturing process is characterized by inefficiency, slower
production rates, higher energy costs, increased product costs, and greater
floor space requirements.
There are
other disadvantages with conventional coatings. In some cases, much
of the applied coating evaporates into the air (solvent based carrier), while
only a fraction of the coating actually remains as a dry coating
film. In addition, overspray coatings are difficult to reuse or
reclaim, and water-borne systems tend to promote corrosion and
flash-rusting. Not only is this an inefficient use of the coating, it
is also responsible for the emission of many harmful airborne
toxins.
Many
conventional, low-tech coatings used today require 20 or more minutes of drying
time (either air dried or forced thermal drying). In the case of air
drying, a process bottleneck can occur, causing reduced production rates. In the
case of thermally induced drying, protective coats can only be applied to
materials able to withstand certain levels of heat. This requires the
disassembly of many manufactured parts before they can be coated and further
increases the time needed for the coating process to be completed. In either
case, the manufacturing process is characterized by inefficiency, slower
production rates, higher energy costs, increased product costs, and greater
floor space requirements.
There are
other disadvantages with conventional coatings. In some cases, much
of the applied coating evaporates into the air (solvent based carrier), while
only a fraction of the coating actually remains as a dry coating
film. In addition, overspray coatings are difficult to reuse or
reclaim, and water-borne systems tend to promote corrosion and
flash-rusting. Not only is this an inefficient use of the coating, it
is also responsible for the emission of many harmful airborne
toxins.
35
Our Solution - Clean
Technology
Liquid
Nanotechnology™, our 100% solids UV-cured industrial coatings clean technology,
addresses all of the issues noted above and provides unique performance
combinations. We have developed over 200 specific individual coating
formulations that address the limitations of traditional carrier-based
coatings, some of which are patent protected. Our coatings cure in
less than a minute after application without the use of heat. This
changes the manufacturing dynamic in four ways. First, UV curing
eliminates the bottleneck effect and makes product disassembly unnecessary,
increasing the speed with which coated products are produced. Second,
the use of UV curing eliminates the need for thermal heating equipment and/or
drying space, allowing manufacturers to use less floor space. Third,
the elimination of thermal heating from the manufacturing process produces
dramatic energy cost savings. Finally, the use of 100% solids results
in fewer harmful airborne emissions being released during production or
application.
Our clean
technology coatings have other advantages. Indeed, a crucial
advantage of our products is that they are more cost effective than conventional
coatings. Our 100% solid coatings offer increased efficiency and
result in minimal wasted product: if a manufacturer needs one mil of dry film
thickness, it need only apply and cure one mil of our coating.
Cleantech
Offerings
Paper – Our paper
coatings provide:
·
|
high
speed curing – seconds, not minutes - compatible with
high speed print operations e.g. 400 feet per minute on flexographic
labels and printed packaging
|
·
|
Barrier
protection – revolutionary thin film properties with tremendous resistance
to water, gas and chemical barriers and low oxygen
transmission
|
·
|
Our
coatings allow the substitution of lower cost paper instead of expensive
and non-recyclable plastic. EcoQuick™ coated paper can replace
polymer laminates on paper, labels and
packaging
|
·
|
Nanotechnology-enhanced
formulations provide coating performance including superior adhesion and
abrasion resistance.
|
Metals - Our metal coatings
provide:
·
|
The
UV curing process uses 80 percent less energy, slashes manufacturing floor
space by up to 80 percent, and eliminates curing
bottlenecks.
|
·
|
High
speed curing – seconds compared to minutes for heat-cured solvent-based
and powder coatings.
|
·
|
Barrier
protection –Unique thin film properties such as water and chemical
resistance, and low oxygen transmission reducing
corrosion.
|
·
|
Nanotechnology-enhanced
formulations provide unique coating performance including superior
adhesion to difficult-to-adhere-to metals with improved scratch
resistance
|
·
|
Increases
manufacturing productivity since UV curing uses no heat; so complex
products containing metal parts with rubber gaskets do not need to be
disassembled prior to the coating and
curing.
|
·
|
Reduces
and/or eliminates EPA compliance burden and
cost.
|
Plastics
- Our Liquid Nanotechnology™ coatings have improved hardness
and abrasion resistance over conventional carrier-based coatings. The
coatings are also noteworthy for their ability to achieve either optical clarity
or accept pigments. Based on laboratory tests, we believe our
formulations offer excellent adhesion to many common plastics, such as
polycarbonate.
Glass
- Our UV curable glass coatings product has achieved solid
optical clarity in both high and low viscosity formulations that have
significant thermal conductivity. The product also offers adhesion
between separate glass products that is less breakable than a single layer
product. Potential applications for this technology include
electronics and visible light consumer products.
Electronics - Our
coatings do not contain either water or organic solvents that may damage
delicate electronic components. Moreover, these coatings are also UV
curable and may be applied and cured without thermal shock to the substrate. We
believe this technology also offers potential for various electronics
applications.
Medical
- We have successfully developed a flexible, urethane based
coating used to bond metal and plastic parts for use on a cardiovascular
device.
36
License
Arrangements
We have
not yet been successful in generating substantial licensing or sales revenue and
our coatings have yet to be incorporated into manufacturers’
products. Many of our potential customers require extensive
performance tests of our technology which can take several years to
complete. In addition, some potential customers are concerned about
our long-term financial viability. We are unable to make predictions
regarding the timing and size of any future royalty payments and/or product
sales. With respect to the licenses described below, we believe that
any royalties depend on the licensee’s ability to market, produce and sell
products incorporating our proprietary technology. We cannot predict
when we will receive any royalty or sales revenue from these licenses, if
ever.
DuPont. On
November 8, 2004, we licensed our platform automotive technology to
DuPont. This non-exclusive license covers all of DuPont’s automotive
metal coating activities in North America. The license is for a term
of fifteen (15) years, terminating on November 8, 2019. The
license provides for royalty payments at a stated percentage of net
sales. To date, we have not received any royalty payments pursuant to
this license as our coatings have yet to be incorporated into products by DuPont
and we cannot predict when we will, if ever. Royalty payments are
entirely dependent on DuPont’s marketing efforts which are beyond our
control. DuPont is not required under the agreement to incorporate
our coatings into DuPont products. The license agreement does not
require DuPont to ensure any minimum level of sales using our
coatings.
Red Spot Paint &
Varnish. On May 6, 2005, we granted Red Spot Paint &
Varnish an exclusive license to manufacture and sell one of our proprietary
products for use on 22 gallon metal propane tanks. The duration of
this license is fifteen years, terminating on May 6, 2020. Upon
consummation of the license, Red Spot made a one-time payment of $125,000 to
us. All of our revenue in 2007 and 2008 was from this one
customer. The license also provides for royalty payments at a stated
percentage of net sales. To date, we have not received any royalty
payments pursuant to this license as our coatings have yet to be incorporated
into Red Spot’s products and we cannot predict when we will, if
ever. Royalty payments are entirely dependent on Red Spot’s marketing
efforts which are beyond our control. Red Spot is not required under
the agreement to incorporate our coatings into Red Spot products. The
license agreement does not require Red Spot to ensure any minimum level of sales
using our coatings.
Medical Device
Company On February 3, 2001, we granted a medical device
company a license to use one of our proprietary products on a cardiovascular
application. All terms of this license are subject to a
confidentiality agreement. The duration of this agreement is
unlimited except upon breach of the agreement by either party. The
medical device company paid us a one time licensing fee of $70,000 and
thereafter we will not receive future revenues under this
agreement.
Prior to
reaching a license agreement with a potential customer, we typically work with
the potential customer on a development phase to better understand its needs and
desired performance levels. A good example of our development phase
is our Collaboration Agreement with Reynolds Innovations Inc. for the
development of a fire standards compliant cigarette. Although we had
previously developed a unique coating to meet this customer’s needs and had
already passed some initial testing, this Agreement provided for a series of
additional tests that must be satisfactorily passed before our coating was used
in the production of cigarettes. This development process with
Reynolds could have taken up to two years to complete. On November
13, 2009, Reynolds terminated the Collaboration Agreement dated August 21, 2009
before we completed any milestone. No payments or penalties were paid
in connection with the termination. Both parties faced difficulties
in overcoming manufacturing issues. Our UV lamps add additional heat in a
tightly controlled (heat and humidity) manufacturing environment. In
addition, no high-speed sensing equipment exists to verify the coating is in
place for every cigarette produced at the anticipated production speed.
In the face of manufacturing challenges and large capital expenditures
this project would require, Reynolds terminated the agreement. As a result
of the termination, we are now free to pursue opportunities with other cigarette
and paper manufacturers.
Marketing
Strategy
Our
target markets include electronics, automotive and trucking, paper and
packaging products and original equipment manufacturers. Our business
model contemplates both a licensing strategy and direct sales
strategy. We intend to license our technology to industry leaders in
the electronics, steel, construction, automotive and medical applications
markets, through which our product will be sold to end users. We plan
to use direct sales teams in certain target markets, such as OEMs, and third
party distributors in broad product markets, such as paper products, to develop
our product sales. Thus, our key promotional activities may
include:
37
•
|
Attendance
and technical presentations at industry trade shows and
conventions;
|
||
•
|
Internal
and external sales forces, with a force of industry-specific sales people
who will identify, call upon and build ongoing relationships with key
purchasers and targeted industries;
|
||
•
|
Fostering
joint development agreements and other research arrangements with industry
leaders and third party consortiums;
|
||
•
|
Print
advertising in journals with specialized industry
focus;
|
||
•
|
Web
advertising, including supportive search engines and Web site registration
with appropriate sourcing entities;
|
||
•
|
Public
relations, industry-specific venues, as well as general media, to create
awareness of us and our products. This will include membership in
appropriate trade organizations; and
|
||
•
|
Brand
identification through trade names associated with us and our
products.
|
Sales
Strategy
To date,
we have conducted all of our business development and sales efforts through our
senior management team who are active in other roles. We intend to
build dedicated sales, marketing, and business development teams to sell our
products. Our initial focus will be either the direct sales of our
products to end users and/or the formation of joint venture arrangements with
established market participants through which our products will be
sold. We also intend to engage in strategic licensing activities
targeted at key markets. Eventually, we hope to also use strategic
external sales forces who can extend the reach of our marketing
efforts.
Our sales
cycle is often longer than one year. The sales process begins
with the identification of potential customers in selected markets. If the
customer is interested, the customer will generally send application samples to
us for initial analysis and testing. We then coat the application
samples using our product. Provided we are able to demonstrate the efficacy of
our product on the application sample to the customer, the customer will then
perform extended durability tests. In most cases, we are unable to
exert any control or influence over the durability test. Upon conclusion of the
durability test, we plan to work with the customer while it decides whether to
purchase our product. We did not generate any sales revenues in
fiscal year 2009.
In some
cases, the potential customer will have to modify its coating production line to
add UV curing to replace its thermal curing equipment. We plan to
work with the customer to assist in the transition of its traditional coating
operations to our technology. We expect that the customer’s
resistance to change, costs, access to capital, and payback on investment will
be factors in its decision to adopt our technology.
FY 2010
Goals
Our
FY2010 goals, given sufficient capital, are to:
·
|
Secure
a suitable facility and build an enhanced research
laboratory;
|
·
|
Complete
the prototype coatings line of the pail manufacturer we have working
with;
|
·
|
Expand
current research initiatives and intellectual property
protection;
|
·
|
Expand
our in-house sales and sales channel business development
team;
|
·
|
Pursue
independent, third party review of our technology through independent
testing and evaluation;
|
·
|
Secure
new sources of revenue.
|
38
Competition
The
industrial coatings industry is extremely competitive. There are
several hundred sources in the United States of conventional paints and coatings
for general metal use, including major sources such as Akzo Nobel, PPG,
Sherwin-Williams and Valspar, who also offer UV coatings primarily for flooring,
graphics, paper and container lithography applications. Direct
competition comes from a variety of UV-cure producers such as Allied
Photochemical, Rad-Cure (Altana Chemie), Red Spot (Fujikura), R&D Coatings,
Northwest (Ashland), DSM Desotech, Prime and other small
sources. Although certain of these competitors offer 100% solids
products, our product technology is unique as demonstrated by our patents and
trade secrets.
Competitive
factors in this industry include ease of use, quality, versatility, reliability,
and cost. Our primary competitors include companies with
substantially greater financial, technological, marketing, personnel and
research and development resources than we currently have. We might
not be able to compete successfully in this market. Further, existing
and new companies may enter the industrial coatings markets in the
future.
Intellectual
Property
Our
ability to compete effectively will depend on our success in protecting our
proprietary technology, both in the United States and abroad. Our
patent and intellectual property activities to date include:
|
·
|
seven
patents covering elements of our technology from the United States Patent
and Trademark Office(“USPTO”)
|
|
·
|
nine
pending patent applications in foreign countries. One patent has been
allowed in China.
|
|
·
|
one
ICT international patent
application
|
|
·
|
three
trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and
“Liquid Nanotechnology™”
|
·
|
200+
coatings formulations.
|
The USPTO
has issued all patents to Sally J.W. Ramsey, our founder and Vice President for
New Product Development, which she irrevocably assigned to us.
In
addition, we have developed over 200 individual coating
formulations. We have taken actions to protect these formulations
under trade secret laws.
It is
possible that no additional patents relating to our existing technology will be
issued from the United States or any foreign patent offices, or that we will not
receive any patents in the future based on our continued development of our
technology, or that our patent protection within and/or outside of the United
States will be sufficient to deter others, legally or otherwise, from developing
or marketing competitive products utilizing our technologies. With
the exception of a patent allowed in China, action with respect to our foreign
patents has been limited to translation of the patent
applications. In addition to seeking patent protection, we will rely
on trade secrets, know-how and continuing technological advancement to seek to
achieve and thereafter maintain a competitive advantage. Although we
have entered into or intend to enter into confidentiality agreements with our
employees, consultants, advisors, and other third parties that we are engaged
with, we cannot be certain that such agreements will be honored or that we will
be able to effectively protect our rights to our unpatented trade secrets and
know-how. Others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets and know-how.
39
Research and
Development
Most of
our efforts are focused on inventive research to discover new ways to coat
substrates using UV curing. Those efforts resulted in a variety of
new UV cured coatings and patents and patent applications to protect those
inventions. Since 2007 most of our commercialization efforts are
related to the application of our cumulative expertise to a different array of
substrates for specific customer applications. By working
closely with potential customers, we believe we position ourselves to better
understand their needs which increases the likelihood they will use our
technology and speed the adoption of our technology in the
marketplace. During this process, our initial customers and we are
each responsible for costs incurred in the development process.
For
fiscal years 2007, 2008, 2009, we spent approximately $200,000, $275,000 and
$175,000 on research and development, respectively. This includes
contracted research, salary expenses of Sally Ramsey, our Vice President of New
Product Development, laboratory expenses and raw materials. During
these three fiscal years, we did not undertake any customer-sponsored research
and development.
Manufacturing
We
presently have a limited manufacturing capacity. We currently have no contracts
in place for the manufacturing of our products. The raw
materials used in our coatings are liquids and we do not believe such materials
have any negative environmental impact. Our business is subject to
many different federal, state, local and foreign governmental regulations
related to the use, storage, discharge and disposal of hazardous
substances. We must conduct our business in compliance with these
regulations. Any changes in such regulations or any change in our
business that requires us to use hazardous materials, could force us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. Increasing public attention has been
focused on the environmental impact of manufacturing
operations. While we have not experienced any adverse effects on our
operations from environmental regulations, and our products are designed to have
no adverse impact on the environment, our business and results of operations
could suffer if for any reason we are unable to comply with present or future
environmental regulations.
Our
principal raw materials suppliers are Cytec Industries, Inc., Chem-Materials
Co., Sartomer Company, Inc., Rahn USA Corp., Evonik and GMZ, Inc.
Employees
As of
December 31, 2009, we had five full-time employees. As of that date,
we had employment agreements with four of our employees.
DESCRIPTION
OF PROPERTY
Our
executive office consists of approximately 1,600 square feet and is located at
2701 Cambridge Court, Suite 100, Auburn Hills,
MI 48326. The lease commenced on September 1, 2008
and continues through September 30, 2010 at an average rate of $2,997 per
month. The lessor, Seven Industries, Inc., is wholly owned by J.B. Smith,
a Director of the Company and the managing partner of Equity 11,
Ltd.
We also
lease approximately 3,600 square feet of laboratory space at 1238 Brittain Road,
Akron, Ohio 44310. We use this facility for manufacturing, storing
and testing of our products. We are currently leasing this property
on a month-to-month basis and the monthly rent is $1,800.
Management
believes that our existing facilities are adequate for our current needs and
that suitable additional space will be available on reasonable terms if
required. Management also believes that our facilities are adequately
insured.
LEGAL
PROCEEDINGS
On
November 18, 2009, Investment Hunter, LLC, one of our note holders, filed suit
in the Supreme Court of New York for repayment of $360,919.57 plus interest,
attorneys fees and costs. We have previously made payments totaling
$300,000 to Investment Hunter to reduce the balance owed under the
note. We have engaged counsel in New York to represent our interests
and file pleadings on our behalf.
40
DIVIDENDS
AND OWNERSHIP INFORMATION
For
information regarding the market price of and dividends on our common stock and
related stockholder matters, see Items 4 and 5 of this prospectus.
For
information regarding the effect of this offering on the amount and percentage
of holdings of our common stock beneficially owned by certain persons, see the
table in Item 7 of this prospectus.
41
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Except
for statements of historical fact, the information presented herein constitutes
forward-looking statements. These forward-looking statements generally can be
identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,”
“forecasts,” “foresees,” “intends,” “plans,” or other words of similar import.
Similarly, statements herein that describe our business strategy, outlook,
objectives, plans, intentions or goals also are forward-looking
statements. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, but are not limited to, our ability
to: successfully commercialize our technology; generate revenues and achieve
profitability in an intensely competitive industry; compete in products and
prices with substantially larger and better capitalized competitors;
secure, maintain and enforce a strong intellectual property portfolio; attract
immediate additional capital sufficient to finance our working capital
requirements, as well as any investment of plant, property and equipment;
develop a sales and marketing infrastructure; identify and maintain
relationships with third party suppliers who can provide us a reliable source of
raw materials; acquire, develop, or identify for our own use, a manufacturing
capability; attract and retain talented individuals; continue operations during
periods of uncertain general economic or market conditions, and; other events,
factors and risks previously and from time to time disclosed in our filings with
the Securities and Exchange Commission, including, specifically, the “Risk
Factors” enumerated herein.
Overview
We
develop nano-enabled, ultra-violet curable coatings that are designed to drive
efficiencies and clean processes in manufacturing. We create
proprietary coatings with unique performance attributes by leveraging our
platform of integrated nano-material technologies. We develop
high-value, high-performance coatings for applications in the specialty paper,
automotive, general industrial, electronic and medical areas. Our
target markets include the electronics, steel, construction, automotive and
trucking, paper products and OEMs. We plan to use direct sales teams
in certain target markets, such as OEMs, and third party distributors in broad
product markets, such as paper products, to develop our product
sales.
Operating
Results
Years
Ended September 30, 2009 and 2008
Results
From Operations
Revenues
for the years ended September 30, 2009 and 2008, were $0 and
$25,092, respectively. Substantially all of our revenues for the year ended
September 30, 2008 derived from our licensing agreement with Red Spot.
These revenues stem from the amortization of the initial payment of $125,000 by
Red Spot to us in May 2005 and not from any subsequent
transactions.
Salaries and
Fringe Benefits. The decrease of approximately $526,000 in
such expenses for the year ended September 30, 2009 compared to the year
ended September 30, 2008 is the result of the elimination of two salaried
employees prior to October 31, 2008, the elimination of a third in March 2009,
the reduction of the salary of one employee effective October 1, 2008, and the
reductions of the salaries of three employees in December 2008. These reductions
were partially offset by the expense associated with the options issued to two
employees in September 2008 and December 2008 as well as the addition of a new
employee in September 2008.
Professional
Fees. The increase of approximately $366,000 in these expenses for the
year ended September 30, 2009 compared to the year ended September 30, 2008 is
the result of the issuance of 2,000,000 options to Trimax in November
2008. These options vested upon issuance, so the entire charge of
$1,368,000 was recognized in that month. This expense was offset by a reduction
of approximately $1,050,000 in fees and options paid or awarded to consultants
for a variety of services. Three such consultants are no longer under agreement
with us and two others have reduced their ongoing fees to us.
42
Other General and
Administrative Expenses. The decrease of approximately $310,000 in these
expenses for the year ended September 30, 2009 compared to the year ended
September 30, 2008 reflects reductions in legal fees relating to SEC filings,
in-sourcing the work of preparing SEC filings, the elimination of debt extension
fees, and the reduction of travel and travel-related expenses.
Operating Losses.
The increased loss between the reporting periods is explained by the
increases in the expense categories discussed above and the decrease in revenue
over the periods.
Interest Income
for the years ended September 30, 2009 and 2008 was $142 and $5,784,
respectively. The decrease resulted from a reduction in our average investable
cash balances between and 2008 and 2009.
Interest
Expense. The decrease of approximately $1,150,000 for the year ended
September 30, 2009 compared to the year ended September 30, 2008 is the result
of the expensing of the value of detachable warrants issued with bridge notes in
the earlier period partially offset by the revaluing of previously issued
detachable warrants and an increase of approximately $700,000 in average
outstanding debt for the 2008 period.
Income Tax
Provision. No provision for income tax benefit from net
operating losses has been made for the years ended September 30, 2009 and
2008 as we have fully reserved the asset until realization is more reasonably
assured.
Net Loss.
The decrease in the Net Loss of approximately $1,588,000 for the year
ended September 30, 2009 compared to the year ended September 30, 2008, while
more fully explained in the foregoing discussions of the various expense
categories, is due primarily to reductions of approximately $1,150,000 in
Interest Expense, $1,007,000 in certain professional fees, $310,000 in Other
General and Administrative expenses, and $526,000 in Salaries and Fringe
Benefits, partially offset by the expensing of a grant of 2,000,000 options
awarded to a consultant in November 2008 and the fact that we recognized no
revenue in the 2009 period.
Basic and Diluted
Loss per Share. The change in basic and diluted net loss per share for
the year ended September 30, 2009 compared with the year ended September 30,
2008 reflects the decreased Net Loss discussed above.
Liquidity and Capital
Resources
Current
and Expected Liquidity
Cash and
cash equivalents as of September 30, 2009 and September 30, 2008 totaled
($0) and $974,276, respectively. The decrease reflects cash used in
operations of $1,555,950, cash used to purchase fixed and intangible assets of
$59,441, and cash used to pay down debt of $372,801. This decrease
was partially offset by borrowings of $75,000 and the issuance of $913,500 in
convertible preferred stock.
We are a
company that has failed to generate significant revenues as yet and have
incurred an accumulated deficit of ($22,688,817), $13,456,402 of this amount is
due to non-cash items, including options expense, the issuance of warrants,
beneficial conversion provisions associated with issuance of preferred stock and
certain debt, and stock issued to pay for services, payables, and debt
extensions. We have incurred losses primarily as a result of general
and administrative expenses, salaries and benefits, professional fees, and
interest expense. Since our inception, we have generated very little
revenue. We have received a report from our independent auditors that
includes an explanatory paragraph describing their substantial doubt about our
ability to continue as a going concern.
We expect
to continue using substantial amounts of cash to: (i) develop and protect
our intellectual property; (ii) further develop and commercialize our
products; (iii) fund ongoing salaries, professional fees, and general
administrative expenses. Our cash requirements may vary materially
from those now planned depending on numerous factors, including the status of
our marketing efforts, our business development activities, the results of
future research and development, competition and our ability to generate
revenue.
43
Historically,
we have financed operations primarily through the issuance of debt and the sale
of equity securities. In the near future, as additional capital is
needed, we expect to rely primarily on the sale of convertible preferred
securities.
As of
September 30, 2009, we had notes payable to three separate parties on which we
owed approximately $739,484 in principal and accrued interest. These
notes do not contain any restrictive covenants with respect to the issuance of
additional debt or equity securities by us. The notes and the accrued
interest totaling $739,484 owing to three note holders were due prior to
September 30, 2008 and their holders demanded payment. We have paid
$320,000 in principal and accrued interest against the original principal and
interest balance on two of these notes. We have made a $5,000 payment
to the third note holder to whom we owed approximately $333,300 in principal and
accrued interest as of September 30, 2009. Additionally, we have
notes owing to shareholders totaling approximately $289,586 including accrued
interest as of September 30, 2009. These notes are due and payable on
December 31, 2009. None of the debt is subject to restrictive
covenants. All of the debt is unsecured.
As of
September 30, 2009, Equity 11 had purchased 3,002 convertible preferred
shares. In addition, we entered into a Securities Purchase Agreement
with SAC on September 30, 2009. On October 1, 2009, SAC acquired 240
shares of our Convertible Preferred Shares, Series B with a purchase price of
$1,000 per share. We received $240,000 of gross proceeds and net
proceeds of $120,000 after payments were made from the Discretionary Fund for
outstanding obligations owed to Mr. Stromback. We will need to raise
immediate additional funds in fiscal year 2010 to continue our operations. At
present, we do not have any binding commitments for additional
financing. If we are unable to obtain additional financing, we would
seek to negotiate with other parties for debt or equity financing, pursue
additional bridge financing, and negotiate with creditors for a reduction and/or
extension of debt and other obligations through the issuance of
stock. At this point, we cannot assess the likelihood of achieving
these objectives. If we are unable to achieve these objectives, we
would be forced to cease our business, sell all or part of our assets, and/or
seek protection under applicable bankruptcy laws.
On
September 30, 2009, we had 32,835,684 common shares issued and outstanding and
3,002 in convertible preferred shares issued and outstanding. These
preferred shares and accumulated and unpaid dividends can be converted into a
total of 10,674,377 shares of our common stock. As of September 30,
2009, options and warrants to purchase up to 9,649,619 shares of common stock
had been granted. Additionally, some of our outstanding notes and
accrued interest may be converted into shares of common stock in order to
conserve cash.
Our
financing agreements with Equity 11 allow Equity 11 the opportunity to match any
other offers of financing that we receive. To date, this provision
has not inhibited our ability to seek alternative financing
arrangements. Equity 11 chose not to match the financing offer that
we recently received from SAC that resulted in a Securities Purchase Agreement
dated September 30, 2009. On December 14, 2009, we extended the
termination date of the Preferred Securities Agreement until the earlier to
occur of June 15, 2010 or the acceptance by our Board of Directors of a new
investment in us by a third party in an amount of at least
$3,000,000.
Our
financing agreements with Equity 11 also require that Equity 11 approve any
capital expenditure greater than $10,000. To date, Equity 11 has not
prevented us from making any capital expenditure greater than
$10,000.
44
Capital
Commitments
Contractual
|
||||||||||||||||||||
Obligations
|
Total
|
Less
Than 1 Year
|
1-3
Years
|
4-5
Years
|
After
5 Years
|
|||||||||||||||
Notes
Payable
|
$
|
840,017
|
$
|
840,017
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Interest
on notes payable
|
189,051
|
189,051
|
—
|
—
|
—
|
|||||||||||||||
Contractual
Service Agreements
|
1,681,584
|
695,834
|
985,750
|
—
|
—
|
|||||||||||||||
Office
Leases
|
37,486
|
37,486
|
--
|
|||||||||||||||||
Equipment
Leases
|
12,830
|
7,044
|
5,786
|
—
|
—
|
|||||||||||||||
Total
Contractual Obligations
|
$
|
2,760,968
|
$
|
1,769,432
|
$
|
991,536
|
$
|
—
|
$
|
—
|
||||||||||
Off-Balance Sheet
Arrangements
Our
off-balance sheet arrangements include contractual service agreements, office
leases and equipment leases. A summary of our off-balance sheet
arrangements is below:
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Total
|
|||||||
Contractual
Service Agreements
|
$695,834
|
$985,750
|
---
|
---
|
$1,681,584
|
||||||
Office
Leases
|
$37,486
|
---
|
$37,486
|
||||||||
Equipment
Leases
|
$7,044
|
$5,786
|
---
|
---
|
$12,830
|
||||||
Total
Off-Balance Sheet Obligations
|
$740,364
|
$991,536
|
---
|
---
|
$1,731,900
|
Our
off-balance sheet contractual service agreements include services provided by
vendors and services by our employees under employment
agreements. Vendor services include IP/PR services, legal services
and business and revenue generation consulting services. The
following table summarizes of our off-balance contractual service
agreements:
Contract
Service
Provider
|
Purpose
|
Monthly
Amount
|
Expiration
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Total
|
||||||||
McCloud
Communications
|
IR/PR
Services
|
$5,000
|
12/31/2009
|
$15,000
|
$15,000 |
|
||||||||||
Wilson,
Sonsini, Goodrich & Rosati
|
SEC
Legal Services
|
$1,667
|
12/31/2009
|
$5,001
|
$5,001 |
|
||||||||||
RJS
Consulting LLC
|
Business
Consulting
|
$16,000
|
9/17/2011
|
$192,000
|
$192,000
|
$384,000
|
|
|||||||||
Robert
Crockett
|
CEO
|
$16,667
|
9/21/2012
|
$200,000
|
$400,000
|
$600,000 |
|
|||||||||
Daniel
Iannotti
|
General
Counsel & Secretary
|
$12,500
|
9/21/2012
|
$146,500
|
$300,000
|
$446,500 |
|
|||||||||
F.
Thomas Krotine
|
COO
& President
|
$5,417
|
9/21/2012
|
$63,583
|
$63,583 |
|
||||||||||
Sally
Ramsey
|
Chief
Chemist
|
$6,250
|
1/1/2012
|
$73,750
|
$93,750
|
$167,500 |
|
|||||||||
Total
Contractual Service Obligations
|
$63,501
|
$695,834
|
$985,750
|
$1,681,584 |
|
45
We have a
lease for our headquarters in Auburn Hills, MI. The space for our
laboratory in Akron, OH is not currently subject to a written lease – we use
that space on a month to month basis. A summary of our Auburn Hills,
MI office lease is summarized in the table below:
Contract
Service
Provider
|
Purpose
|
Monthly
Amount
|
Expiration
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Total
|
Seven
Industries, Ltd.
|
Auburn
Hills, MI Headquarters
|
$2,952
|
11/30/2009
|
$5,904
|
$5,904
|
|||
$3,110
|
5/31/2010
|
$18,966
|
$18,966
|
|||||
$3,154
|
9/30/2010
|
$12,617
|
$12,617
|
We lease
computer equipment and our office printer/copier for our Auburn Hills, MI
headquarters. A summary of our off-balance sheet leases for computer
equipment and the printer/copier is shown in the table below:
Contract
Service
Provider
|
Purpose
|
Monthly
Amount
|
Expiration
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Total
|
Dell
Financial Services
|
Computer
Equipment
|
$42
|
6/17/2010
|
$336
|
$336
|
|||
Dell
Financial Services
|
Computer
Equipment
|
$44
|
7/17/2010
|
$396
|
$396
|
|||
Ricoh
America
|
Printer/Copier
|
$526
|
9/22/2011
|
$6,312
|
$5,786
|
$12,098
|
See also
Notes to the Consolidated Financial Statements in this prospectus. The details
of such arrangements are found in Note 5 – Commitments and Contingencies and
Note 10 – Subsequent Events.
Critical Accounting Policies
and Estimates
Our
financial statements are prepared in accordance with U.S. Generally Accepted
Accounting Principles. Preparation of the statements in accordance with these
principles requires that we make estimates, using available data and our
judgment, for such things as valuing assets, accruing liabilities and estimating
expenses. The following is a discussion of what we feel are the most critical
estimates that we must make when preparing our financial
statements.
Revenue
Recognition. Revenues from licensing contracts are recorded
ratably over the life of the contract. Contingency earnings such as royalty fees
are recorded when the amount can reasonably be determined and collection is
likely.
Income Taxes and
Deferred Income Taxes. We use the asset and liability approach
for financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the bases of assets and liabilities as
reported for financial statement purposes and income tax purposes and for the
future use of net operating losses. We have recorded a valuation allowance
against our net deferred income tax asset. The valuation allowance reduces
deferred income tax assets to an amount that represents management’s best
estimate of the amount of such deferred income tax assets that more likely than
not will be realized.
Property and
Equipment. Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is recorded using the straight-line
method over the following useful lives:
Computer
equipment
|
3-10 years
|
||
Furniture
and fixtures
|
3-7 years
|
||
Test
equipment
|
5-7 years
|
||
Software
|
3 years
|
46
Repairs
and maintenance costs are charged to operations as incurred. Betterments or
renewals are capitalized as incurred.
We review
long lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset with future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
Patents. It
is our policy to capitalize costs associated with securing a patent. Costs
consist of legal and filing fees. Once a patent is issued, it is amortized on a
straight-line basis over its estimated useful life. For purposes of the
preparation of the audited, consolidated financial statements found elsewhere in
this prospectus, we have recorded amortization expense associated with the
patents based on an eight year useful life.
Stock-Based
Compensation. We have a stock incentive plan that provides for
the issuance of stock options, restricted stock and other awards to employees
and service providers. We calculate compensation expense under SFAS 123(R) using
a Black-Scholes option pricing model. In so doing, we estimate certain key
assumptions used in the model. We believe the estimates we use, which are
presented in Note 7 of Notes to the Consolidated Financial Statements, are
appropriate and reasonable.
Recent Accounting
Pronouncements
In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, as amendment to SFAS No. 140 (SFAS166). SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. We will adopt SFAS 166 in fiscal 2010 as applicable. It would not have had
any impact on any of the financial statements that we’ve issued to
date.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (SFAS 167). SFAS 167 amends FASB Interpretation
No. 46 (Revised December 2003), “Consolidation of Variable Interest
Entities—an interpretation of ARB No. 51,” (FIN 46(R)) to require an
enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a variable
interest entity; to require ongoing reassessments of whether an enterprise is
the primary beneficiary of a variable interest entity; to eliminate the
quantitative approach previously required for determining the primary
beneficiary of a variable interest entity; to add an additional reconsideration
event for determining whether an entity is a variable interest entity when any
changes in facts and circumstances occur such that holders of the equity
investment at risk, as a group, lose the power from voting rights or similar
rights of those investments to direct the activities of the entity that most
significantly impact the entity’s economic performance; and to require enhanced
disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity. SFAS 167 becomes effective on January 1, 2010. We do not anticipate
SFAS 167 will have a material impact on our consolidated financial statements
upon adoption.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .
None.
47
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTER, AND CONTROL PERSONS
The
following table sets forth as of December 31, 2009, the name, age, and position
of each Executive Officer and Director and the term of office of each Director
and significant employees.
Name
|
Age
|
Position
|
J.B.
Smith
|
37
|
Director
|
Rocco
DelMonaco, Jr.
|
56
|
Director
|
Joseph
Nirta
|
46
|
Director
|
Robert
G. Crockett
|
51
|
Chief
Executive Officer
|
F.
Thomas Krotine
|
68
|
President
and Chief Operating Officer
|
Daniel
V. Iannotti
|
54
|
Vice
President, General Counsel & Secretary
|
Kevin
Stolz
|
46
|
Chief
Financial Officer, Controller and Chief Accounting
Officer
|
Sally
J.W. Ramsey
|
56
|
Vice
President – New Product Development
|
Under
Section 5.1 of the Securities Purchase Agreement and Section 5.1 of the
Preferred Securities Agreement, Equity 11 has the right to elect three of the
five directors to our Board of Directors. Mr. Smith is one of the
Directors appointed by Equity 11 and Joseph Nirta is other Equity 11 elected
Director. Equity 11 has the ability to appoint a third director at
any time but has not done so as of the date of this prospectus. Each
other Director serves for a term of one year and until his successor is duly
elected and qualified. Each officer serves at the pleasure of the Board of
Directors subject to any applicable employment agreements.
Set forth
below is certain biographical information regarding each of our current
executive officers, directors and significant employees as of September 30,
2009.
J.B.
Smith. Mr. Smith currently is the Managing Partner for Equity
11, Ltd. Equity 11’s portfolio companies employ the largest collection of former
federal law enforcement agents in the private sector. Smith is also
currently serving as Chairman of Isekurity, the nation’s leader in identity
theft solutions and holds a bachelor’s degree in Administration of Justice from
The Pennsylvania State University. Smith has served as a member of
Stealth Investigations LLC since 2003, and has been a partner in Sky Blue
Ventures since 2004. Also known as the creator of the “Philanthropic
InvestmentSM,” Smith is a partner in WM
Reign, Ltd., an investment model solely dedicated to helping finance churches
and Christian causes by utilizing Smith’s “Philanthropic
InvestmentSM” concept.
Rocco DelMonaco,
Jr. Mr. DelMonaco became a Director on September 15, 2008, and
is our only independent Director. Mr. DelMonaco has been the Vice
President of Security for Georgetown University since 2007. From 2005
to 2007, Mr. DelMonaco was an Assistant Executive Director of ManTech Security
and Mission Assurance Corporation. From 2004 to 2005, Mr. DelMonaco
was the Acting Director with the Department of Homeland Security, Incident
Management Division. From 2002 to 2004, Mr. DelMonaco was a Special
Agent in Charge- Liaison Division with the Department of Homeland Security,
Federal Air Marshall Service. From 1980 to 2002, Mr. DelMonaco was a
Supervisory Special Agent with the United States Secret Service. Mr.
DelMonaco received his BA from the University of Miami and his Masters of Public
Administration from Pepperdine University.
Joseph
Nirta. On October 20, 2008, Joseph Nirta was elected as a
Director. Mr. Nirta was the co-founder of BondExchange LLC and BondDesk
Group LLC. The electronic bond trading platform created by Mr. Nirta
revolutionized the online bond trading market. Nirta served as Bond Desk Group’s
chief information officer and a board member since 1999. He has a Bachelor of
Mathematics in Computer Science from the University of Waterloo, Waterloo,
Ontario, and is a Certified Oracle DBA.
48
Robert G.
Crockett. Mr. Crockett joined us as our Chief Executive
Officer on September 15, 2008. From 2007 to September, 2008, Mr.
Crockett served in Advanced Sales Development for JCIM L.L.C., a an automotive
plastics supplier and joint venture between Johnson Controls Inc. and private
equity. In 2007, Mr. Crockett served as President – Exterior Painted
Products for Plastech, a privately held plastic component
supplier. From 2004 to 2006 he also served as Vice President of
Plastech as part of the executive team acquired from LDM Technologies
Inc. From 1997 through 2004, Mr. Crockett served as Director for LDM
Technologies Inc., a privately held automotive exterior and interior
supplier. From 1996 to 1997, he was a Vice President at the Becker
Group, a privately held automotive interior supplier. Mr. Crockett
holds a B.S. in Business from Central Michigan University.
F. Thomas
Krotine. Since October 30, 2006, Mr. Krotine has served as our
President and from October 30, 2006 until August 15, 2007, he served as our
Chief Executive Officer. From August 15, 2007 to the present, he has
also served as the Chief Operating Officer. Mr. Krotine is an
industry veteran with extensive coatings industry and materials-based
experience. From 2001 to 2006, Mr. Krotine was a Principal of
TBD Associates, a technology and business development consulting
company. From 1996 to 2001, he served as Chairman of CV
Materials, a privately-held a supplier of porcelain enamel materials and
coatings. Prior to his role at CV Materials, from 1992 to 1996 he was
the Manager of TK Holdings, a private company which he formed to acquire equity
holdings in small-to-medium-sized manufacturing companies. From 1990
to 1992, he served as a Vice President at Valspar, a publicly-held coatings
company, where he managed Valspar’s North American powder coating
business. From 1980 to 1990, he served as Senior Vice President at
Sherwin-Williams Company, a publicly-held paint and coatings concern, where he
was responsible for technology management and corporate environmental and health
compliance. Mr. Krotine holds a B.A., an M.S. and a Ph.D. in
Metallurgy and Materials Science from Case Western Reserve University in
Cleveland, Ohio.
Daniel V.
Iannotti. Mr. Iannotti became our General Counsel and
Secretary on August 11, 2008. From 2004 to 2008, Mr. Iannotti served
as a Principal of TheGeneralCounsel.com. From 2003 to 2004, he served
as the General Counsel and Secretary of Origen Financial, LLC. During
his career, Mr. Iannotti previously served as general counsel for three
publically held companies including Prodigy Communications, Hoover’s, and Origen
Financial. He also spent several years as a staff attorney for
Ameritech, now AT&T. Mr. Iannotti holds a BA and MBA from
Michigan State University. He received his Juris Doctor degree, cum laude, from the Wayne
State University Law School, where he was an editor of the Wayne Law
Review. Iannotti is licensed to practice law in Michigan and
Illinois.
Kevin
Stolz. Mr. Stolz became our Controller and Chief Accounting
Officer on February 1, 2007 and our Chief Financial Officer on March 26,
2008. From 1999 until 2007, Mr. Stolz was the principal of Kevin
Stolz and Associates, Ltd., a Troy, Michigan-based management consulting firm
specializing in providing financial and operations consulting
services. From 1985 to 1987, Mr. Stolz worked as an auditor at
Coopers & Lybrand, a public accounting firm, and from 1988 to 1992 he worked
in commercial lending at JP Morgan/Chase. From 1997 to 1999, he was
the Vice President of Manufacturing of Unique Fabricating, Inc. a privately held
Detroit automotive supplier; from 1996 to 1997, a Controller at Broner Glove and
Safety, Inc. a privately held wholesale distributor, and; from 1992 to 1995 the
Director of Operations for Virtual Services, Inc., a privately held computer
services firm. Mr. Stolz has an M.B.A. from the University of
Notre Dame and a B.B.A. in Accounting from the University of
Portland.
Sally Judith
Weine Ramsey. Ms. Ramsey is our founder. From 1990 to the
present, Ms. Ramsey served as Vice President of Ecology-CA and from 1990 to
November 2006 served as Secretary. From 1990 to
November 2003, she served as a director of Ecology-CA. As of July 27,
2007, Ms. Ramsey was elected our Vice President of New Product
Development. Ms. Ramsey is a graduate of the Bronx School of
Science and holds a B.S. in Chemistry with honors from Hiram
College.
Committees
of the Board of Directors
49
Audit
Committee
Since
July 2008, the entire Board has acted on any matter requiring Audit Committee
approval. Our Board, acting as the Audit Committee, appoints
our independent auditors, reviews audit reports and plans, accounting policies,
financial statements, internal controls, audit fees, and certain other expenses
and oversees our accounting and financial reporting process. Specific
responsibilities include selecting, hiring and terminating our independent
auditors; evaluating the qualifications, independence and performance of our
independent auditors; approving the audit and non-audit services to be performed
by our auditors; reviewing the design, implementation, adequacy and
effectiveness of our internal controls and critical accounting policies;
overseeing and monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate to financial
statements or accounting matters; reviewing any earnings announcements and other
public announcements regarding our results of operations, in conjunction with
management and our public auditors; and preparing the report that the Securities
and Exchange Commission will require in our Form 10-K. On
October 18, 2007, the Audit Committee adopted a written
charter.
Director
Independence
Mr.
DelMonaco is our only independent Director. Both our Audit Committee
and Compensation Committee Charters set forth the following to determine whether
a Director is independent: (1) the independence requirements of the
NASDAQ Stock Market, (2) a “non-employee director” within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended
(the “1934 Act”), and (3) be an “outside director” under the regulations
promulgated under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”). Mr. Smith and Nirta not considered to be
independent Directors.
Compensation
Committee
Since
July 2008, the entire Board has acted on any matter requiring Compensation
Committee approval.
Our
Board, acting as the Compensation Committee, assists in the development plans
and compensation of our officers, directors and employees. Specific
responsibilities include approving the compensation and benefits of our
executive officers; reviewing the performance objectives and actual performance
of our officers; administering our stock option and other equity compensation
plans; and reviewing and discussing with management the compensation discussion
and analysis that the Securities and Exchange Commission regulations will
require in our future Form 10-Ks. On October 18, 2007 the Board
of Directors adopted a written Compensation Committee charter.
Compensation
Committee Interlocks and Insider Participation
Mr.
DelMonaco is the sole member of our Compensation Committee since his appointment
on September 15, 2008. Mr. DelMonaco has not at any time been an
officer or employee of the company. We have not entered into any
contracts or other transactions with Mr. DelMonaco. None of our
executive officers serves, or in the past year has served, as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers who serve on our board of directors or compensation
committee.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Act of 1934, as amended, requires our Directors and Executive
Officers, and persons who own more than ten percent (10%) of a registered class
of our equity securities, to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities.
Officers, Directors and greater than ten percent (10%) shareholder are required
by SEC regulations to furnish us with copies of all Section 16(a) forms they
file.
To our
knowledge, based solely on a review of such materials as are required by the
Securities and Exchange Commission, the following officers, directors or
beneficial holders of more than ten percent of our issued and outstanding shares
of Common Stock failed to file in a timely manner with the Securities and
Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934, as amended, during the
fiscal year ended September 30, 2009:
50
Director,
Officer or 10% Beneficial Owner
|
Number
of Late Reports
|
Number
of Transactions Not Reported On A Timely Basis
|
Failure
to File Required Form
|
Date(s)
of Filings
|
JB
Smith, Director
|
2
|
2
|
N/A
|
October
2, 2008 & January 26, 2009
|
Richard
Stromback, Former Director
|
1
|
1
|
N/A
|
January
26, 2009
|
Daniel
Iannotti
|
1
|
1
|
N/A
|
December
23, 2008
|
Code
of Ethics
We have
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. A copy of our Code of Ethics may be
obtained without charge by sending a written request to us at 2701 Cambridge
Court, Suite 100, Auburn Hills, MI 48326, Attn: Investor Relations.
Executive
Compensation
The table
below sets forth all cash compensation paid or proposed to be paid by us to our
chief executive officer and the most highly compensated executive officers, and
key employees for services rendered in all capacities to us during fiscal years
ended September 30, 2009 and 2008.
The table
below sets forth all cash compensation paid or proposed to be paid by us to our
chief executive officer and the most highly compensated executive officers, and
key employees for services rendered in all capacities to us during fiscal years
ended September 30, 2009 and 2008.
Summary
Compensation Table
Change
in
|
||||||||||||||||||||||||||||||||||||
Pension
|
||||||||||||||||||||||||||||||||||||
Value
and
|
||||||||||||||||||||||||||||||||||||
Non-Equity
|
Nonqualified
|
|||||||||||||||||||||||||||||||||||
Incentive
|
Deferred
|
|||||||||||||||||||||||||||||||||||
Stock
|
Option
|
Plan
|
Compensation
|
All
Other
|
||||||||||||||||||||||||||||||||
Year
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
||||||||||||||||||||||||||||
Name
(a)
|
(b)
|
($)
(c)
|
($)
(d)
|
($)
(e)
|
($)
(f) (1)
|
($)
(g)
|
($)
(h)
|
($)
(i)
|
($) (j)
|
|||||||||||||||||||||||||||
Richard
D. Stromback,
|
2009
|
$
|
0
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
0
|
|||||||||||||||||||
Former
Chairman & CEO (2)
|
2008
|
$
|
305,789
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
305,789
|
|||||||||||||||||||
Robert
G. Crockett, CEO (3)
|
2009
|
$
|
200,000
|
$
|
-0-
|
$
|
-0-
|
$
|
411,867
|
(8)
|
$
|
-0-
|
$
|
-0-
|
$
|
21,261
|
(5)
|
$
|
464,328
|
|||||||||||||||||
2008
|
$
|
8,333
|
$
|
-0-
|
$
|
-0-
|
$
|
254,701
|
$
|
-0-
|
$
|
-0-
|
$
|
1,297
|
$
|
263,034
|
||||||||||||||||||||
Sally
J.W. Ramsey,
|
2009
|
$
|
89,167
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
17,265
|
(5)
|
$
|
106,432
|
||||||||||||||||||
Vice
President – New
|
2008
|
$
|
195,833
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
12,564
|
(5)
|
$
|
208,397
|
||||||||||||||||||
Product
Development (4)
|
||||||||||||||||||||||||||||||||||||
F.
Thomas Krotine
|
2009
|
$
|
50,667
|
$
|
-0-
|
$
|
-0-
|
$
|
104,288
|
(9)
|
$
|
-0-
|
$
|
-0-
|
$
|
8,873
|
(5)
|
$
|
120,603
|
|||||||||||||||||
COO,
Director
|
2008
|
$
|
160,000
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
7,342
|
(5)
|
$
|
167,342
|
||||||||||||||||||
David
W. Morgan
|
2009
|
$
|
54,375
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
(6)
|
$
|
-0-
|
$
|
-0-
|
$
|
22,945
|
(5)(7)
|
$
|
77,320
|
|||||||||||||||||
Vice
President, CFO and Treasurer (6)
|
2008
|
$
|
210,000
|
$
|
-0-
|
$
|
-0-
|
$
|
180,367
|
$
|
-0-
|
$
|
-0-
|
$
|
27,687
|
(5)(7)
|
$
|
418,054
|
||||||||||||||||||
Kevin
Stolz
|
2009
|
$
|
67,667
|
$
|
18,304
|
$
|
-0-
|
$
|
-0-
|
$
|
22,438
|
(5)
(6)
|
$
|
108,409
|
||||||||||||||||||||||
CFO (6)
|
2008
|
$
|
133,333
|
$
|
160,561
|
$
|
-0-
|
$
|
-0-
|
$
|
16,349
|
(5)
|
$
|
310,243
|
||||||||||||||||||||||
Daniel
Iannotti, General Counsel & Secretary
|
2009
|
$
|
115,000
|
$
|
280,264
|
$
|
17,015
|
(5)
|
$
|
412,279
|
||||||||||||||||||||||||||
2008
|
$
|
21,058
|
$
|
-0-
|
$
|
1,577
|
(5)
|
$
|
22,635
|
51
(1)
|
See
Note 7 in the Consolidated Financial Statements included in our Form 10-K
for our fiscal year ended September 30, 2009 for a discussion of the
assumptions underlying the value of the compensation disclosed in this
column.
|
|
(2)
|
Mr. Stromback
resigned as our CEO on September 15, 2008. Effective October 1, 2008, he
was engaged by us as a consultant through an entity named RJS Consulting,
LLC. Mr. Stromback resigned from our Board on October 1,
2009.
|
|
(3)
|
Mr.
Crockett began employment with us as CEO on September 17, 2008. His annual
salary is $200,000. He was awarded 330,000 options on that
date, the value of which is disclosed in Option Awards in this table. On
September 21, 2009, our Board, re-set the strike price of these options to
$0.51 per share and accelerated the vesting of these options to 110,000
vesting on September 15, 2009, March 15, 2010 and September 15, 2010,
respectively. The value associated with the reset of the strike price and
the acceleration of the vesting period was $168,800 He was awarded 670,000
options with a strike price of $0.51 per share on September 21, 2009, with
a value of $243,067
|
|
(4)
|
Ms. Ramsey
entered into an employment agreement with us on January 1,
2007. Pursuant to such employment contract, she will receive a
salary of $180,000 for the calendar year 2007, a salary of $200,000 for
the calendar years 2008 through 2011, and a salary of $220,000 for
calendar year 2012. Pursuant to amendments of her employment
agreement, Ms. Ramsey’s current salary is $75,000 per
year. Ms. Ramsey was awarded options to purchase 450,000
shares of common stock that vest over five years.
|
|
(5)
|
These
amounts reflect health insurance for all persons shown.
|
|
(6)
|
Mr.
Morgan resigned as Chief Financial Officer on March 26, 2009. Mr. Stolz
was appointed our Chief Financial Officer on March 26,
2009. Mr. Morgan forfeited 225,000 options as a result of his
resignation.
|
|
(7)
|
Reflects
automobile allowance paid to Mr. Morgan.
|
|
(8)
|
Reflects
$25,395 in new options issued 9/21/09 and $107,488 in value associated
with accelerating the vesting period associated with 330,000 options
issued in October, 2009. The acceleration was approved by our board on
September 21, 2009. The options issued in October, 2009 had a value of
$147,380
|
|
(9)
|
On
September 21, 2009, our Board re-set the strike price of 80,237 of Mr.
Krotine’s options to $.40 and the strike price of 250,982 of his options
to $1.00. The value of these resets totaled $43,225. Also on that date,
our Board issued 169,000 additional options to Mr. Krotine with a value of
$61,063.
|
52
Compensation
Components
We are
still in our inception stage and the main elements of our compensation package
consist of base salary, stock options, and bonus.
Base Salary
. The base salary for each executive officer is reviewed and compared to
the prior year, with considerations given for increase. Base salary
adjustments will be based on both individual and company performance and will
include both objective and subjective criteria specific to each executive’s role
and responsibility.
Certain
of our executive’s base salaries were reduced effective from December 1, 2008
until September 21, 2009 as shown below:
Executive
|
Base Salary 10/1/2008
|
Base Salary 12/1/2008 –
9/21/2009
|
Base Salary After
9/21/2009
|
Daniel
Iannotti
|
$150,000
|
$108,000
|
$150,000
|
Thomas
Krotine
|
$160,000
|
$24,000
|
$65,000
|
Sally
Ramsey
|
$200,000
|
$60,000
|
$75,000
|
Stock
Options. Stock option awards are determined by the Board of
Directors based on several factors, some of which include responsibilities
incumbent with the role of each executive, tenure, as well as company
performance, such as shipment of product at certain thresholds. The
vesting period of options is also tied, in some instances, to company
performance directly related to certain executive’s
responsibilities.
Bonuses. To
date, bonuses have been granted on a limited basis, with these bonuses related
to meeting certain performance criteria that are directly related to areas
within the executive’s responsibilities, such as production of product and sales
of product to customers. As we continue to evolve, more defined bonus
programs are expected to be created to attract and retain our employees at all
levels. No bonuses were granted in fiscal year 2009.
Other. At
this time, we have no profit sharing plan in place for employees. We
reimburse all or a portion of health insurance costs for our
employees.
Mr. Stromback
earned a base salary of $305,789 during 2008 but no compensation in fiscal year
2009. He was employed under an employment agreement effective January
1, 2008. He resigned his position as CEO on September 15,
2008. Effective October 1, 2008, Mr. Stromback signed a consulting
contract with us that expires on September 11, 2011. The contract
calls for monthly payments of $16,000, a monthly office expense reimbursement of
$1,000, and payment for Mr. Stromback’s attendance at certain
events. Mr. Stromback resigned from our Board of Directors on October
1, 2009.
Mr.
Crockett was named our CEO on September 15, 2008. He receives a base
salary of $200,000 and health care benefits. Additionally, he was
awarded 330,000 options to purchase shares of our common stock at $1.05 per
share. The options vest in 110,000 option increments over a thirty
month period, with the first tranche becoming exercisable on March 15, 2010, the
middle tranche becoming exercisable on September 15, 2010, and the final tranche
becoming exercisable on March 15, 2011. The options expire on
September 11, 2018. He earned $8,333 in base salary in 2008 and the
aforementioned options were valued at $254,701. Additionally, we paid
$1,297 in medical insurance premiums on his behalf, bringing his total 2008
compensation to $263,034. On September 21, 2009, we entered into a
three year employment agreement with Mr. Crockett with a annual salary of
$200,000, re-setting the strike price to $0.51 per share and accelerating the
vesting of existing options held by him and granting him an additional 670,000
stock options with an exercise price of $0.51 per share with a term of ten
years.
53
Ms. Ramsey
has a base salary of $60,000 and earned compensation of $89,167 in fiscal year
2009. Additionally, we paid health insurance premiums of $12,564 on
her behalf. Her total compensation for 2008 was
$208,397. She is employed under an agreement dated January 1,
2007. The employment agreement is for a term of five years from
January 1, 2007 through January 1, 2012. Her salary for the
first year is $180,000, then $200,000 for years two through four, and finally
$220,000 for year five. Ms. Ramsey earned a base salary of $157,146
during 2007 along with a bonus of $6,667 for performance criteria she met during
the year. These earnings, coupled with the $335,442 of stock options
and $10,081 in company-paid health insurance premiums, brought her total
compensation to $509,336 for 2007. On January 1, 2007, Ms. Ramsey was
granted options to purchase 450,000 shares of our common stock at $2 per
share. The options vest in tranches of 150,000 each on January 1st of
2010, 2011, and 2012 and expire on January 1, 2017. On September 21,
2009, we signed the Second Amendment to Ms. Ramsey’s employment agreement
increasing Mr. Ramsey’s salary to $75,000 per year.
Mr. Krotine
earned a base salary of $160,000 during 2008 until December 3, 2008 when it was
reduced to $24,000 annually. In addition, we paid $7,342 in medical
insurance premiums on his behalf, bringing his total compensation for 2008 to
$167,342. He earned a base salary of $155,248 during
2007. These earnings, coupled with the $16,545 of stock options and
$5,277 in company-paid health insurance premiums and $5,064 of auto allowance,
brought his total compensation to $182,134 for 2007. On November 1,
2006, he was awarded options to purchase 321,217 shares of our common stock at
$2 per share. 80,237 of these options vested on November 1, 2007 and
the remaining 240,980 vested on November 1, 2008. These options
expire on November 1, 2016. He was also awarded 10,000 options on
February 1, 2007 for service as a director. These options have an
exercise price of $2 per share, vested on April 1, 2008, and expire on February
1, 2017. He was employed under an employment agreement that expired
on November 1, 2008. On September 21, 2009, we entered into a new
employment agreement with Mr. Krotine increasing his salary to $65,000 per year
and awarding him 169,000 stock options to purchase our common stock at $0.51 per
share with a term of ten years.
Outstanding
Equity Awards at Fiscal Year 2009 End
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||||||||||
Equity
|
Equity
|
|||||||||||||||||||||||||||||||||||
Incentive
|
Incentive
|
|||||||||||||||||||||||||||||||||||
Equity
|
Number
|
Plan
|
Plan
|
|||||||||||||||||||||||||||||||||
Incentive
|
of
|
Market
|
Awards:
|
Awards:
|
||||||||||||||||||||||||||||||||
Plan
|
Shares
|
Value of
|
Number
of
|
Market
or
|
||||||||||||||||||||||||||||||||
Number
of
|
Number
of
|
Awards:
|
or
Units
|
Shares or
|
Unearned
|
Payout
Value
|
||||||||||||||||||||||||||||||
Securities
|
Securities
|
Number
of
|
of
|
Units
of
|
Shares,
|
of
Unearned
|
||||||||||||||||||||||||||||||
Underlying
|
Underlying
|
Securities
|
Stock
|
Stock
|
Units
or
|
Shares,
Units
|
||||||||||||||||||||||||||||||
Unexercised
|
Unexercised
|
Underlying
|
That
|
That
|
Other
|
or Other
|
||||||||||||||||||||||||||||||
Options
|
Options
|
Unexercised
|
Option
|
Option
|
Have
|
Have
|
Rights That
|
Rights
That
|
||||||||||||||||||||||||||||
(#)
|
(#)
|
Unearned
|
Exercise
|
Expiration
|
Not
|
Not
|
Have
Not
|
Have
Not
|
||||||||||||||||||||||||||||
Exercisable
|
Unexercisable
|
Options
(#)
|
Price
|
Date
|
Vested
|
Vested
|
Vested
|
Vested
|
||||||||||||||||||||||||||||
Name
(a)
|
(b)
|
(c)
|
(d)
|
($)
(e)
|
(f)
|
(#)
(g)
|
($)
(h)
|
(#)
(i)
|
($)
(j)
|
|||||||||||||||||||||||||||
Richard
D. Stromback
|
10,000
|
0
|
2.00
|
3/01/2017
|
||||||||||||||||||||||||||||||||
Sally
J.W. Ramsey
|
0
|
450,000
|
2.00
|
1/01/2017
|
||||||||||||||||||||||||||||||||
F.
Thomas Krotine
|
321,219
|
.85
|
11/01/2016
|
|||||||||||||||||||||||||||||||||
10,000
|
1.00
|
3/01/2017
|
||||||||||||||||||||||||||||||||||
169,000
|
.51
|
9/21/2019
|
||||||||||||||||||||||||||||||||||
Robert
G. Crockett
|
110,000
|
.51
|
9/15/2018
|
|||||||||||||||||||||||||||||||||
890,000
|
.51
|
9/21/2019
|
||||||||||||||||||||||||||||||||||
Kevin
P. Stolz
|
25,000
|
1.05
|
2/1/2017
|
|||||||||||||||||||||||||||||||||
25,000
|
25,000
|
1.05
|
2/1/2018
|
|||||||||||||||||||||||||||||||||
10,000
|
1.05
|
9/17/2018
|
||||||||||||||||||||||||||||||||||
10,000
|
30,000
|
1.00
|
7/31/2019
|
|||||||||||||||||||||||||||||||||
J.B.
Smith
|
100,000
|
0
|
1.05
|
9/17/2018
|
||||||||||||||||||||||||||||||||
Rocco
DelMonaco
|
100,000
|
0
|
1.05
|
9/17/2018
|
||||||||||||||||||||||||||||||||
Joseph
Nirta
|
100,000
|
1.04
|
10/20/2019
|
54
Mr. Stromback
was granted 10,000 options under the 2007 Stock Option Plan for serving as a
director. All options are priced at $2.00 per share and expire in ten
(10) years. None of the options vested at time of issuance and
all 10,000 options vested on April 1, 2008.
Ms. Ramsey
was granted 450,000 options under the 2007 Stock Option Plan. All
options are priced at $2.00 per share and expire in ten
(10) years. None of the options vested at the time of issuance.
On January 1, 2010, 150,000 options will vest, 150,000 options will vest on
January 1, 2011, and 150,000 options will vest on January 1,
2012.
Mr. Krotine
was granted 331,217 options under the 2007 Stock Option Plan. All
options are priced at $2.00 per share and expire in ten
(10) years. None of the options vested at the time of
issuance. On November 1, 2007, 80,237 options vested and 240,982
options vested on November 1, 2008. Mr. Krotine received 10,000
options as part of the 2007 Stock Option Plan for service as a director, which
vested on April 1, 2008. These options have an exercise price of
$2.00 per share and expire ten (10) years from the date of
issuance. On September 21, 2009, Mr. Krotine was granted 169,000
additional options priced at $.51 per share with a term of ten (10)
years. These newly issued options will expire in ten (10) years
(September 15, 2019).
Mr.
Crockett was awarded 330,000 options to purchase shares of our common stock at
$1.05 per share. None of the options were exercisable at
issuance. The options vest in 110,000 option increments over a thirty
month period, with the first tranche becoming exercisable on March 15, 2010, the
middle tranche becoming exercisable on September 15, 2010, and the final tranche
becoming exercisable on March 15, 2011. On September 17, 2009, our
Board re-set the strike price for these options to $.51 per share and adjusted
the vesting of these options so that 110,000 increments each vest on September
15, 2009, March 15, 2010 and September 15, 2010 respectively. The options expire on
September 17, 2018. On September 21, 2009, Mr. Crockett was granted
670,000 additional options priced at $.51 per share with 167,500 options
exercisable on March 2011, 167,500 options exercisable on September 15, 2011,
167,500 options exercisable on March 15, 2012 and 167,500 options exercisable on
September 15, 2012. These newly issued options will expire in ten
(10) years (September 15, 2019).
Mr. Smith
was awarded 100,000 options to purchase shares of our common stock at $1.05 per
share. None of the options were exercisable at
issuance. The options vested on September 15, 2009 and expire on
September 15, 2018. These options are personal to Mr. Smith and do
not include convertible preferred shares and warrants issued to Equity
11. Mr. Smith is the managing partner of Equity 11.
Mr.
DelMonaco was awarded 100,000 options to purchase shares of our common stock at
$1.05 per share. None of the options were exercisable at
issuance. The options vested on September 15, 2009 and expire on
September 15, 2018.
Mr. Nirta
was awarded 100,000 options to purchase shares of our common stock at $1.04 per
share. None of the options were exercisable at issuance. The options vested on
October 20, 2009 and expire on October 20, 2018.
At the
end of 2008, all of the 4,500,000 options available under the 2007 Plan had been
granted. On December 2, 2008, the Board of Directors authorized the
addition of another 1,000,000 shares to the 2007 Plan. The table
above indicates options granted under the Plan to certain executives in fiscal
2009. The balance of the options under the 2007 Plan were granted to
consultants, other employees, and past and current directors. In
2009, 1,439,000 options were granted under the 2007 Plan, 900,000 were forfeited
and 50,000 were exercised.
55
Stock
Option Plans
Our Board
of Directors adopted the 2007 Stock Option and Restricted Stock Plan (the “2007
Plan”) on May 9, 2007 and the shareholders approved the Plan on
June 4, 2007. The 2007 Plan authorized us to issue up to 4,500,000 shares
of our common stock for issuance upon exercise of options and grant of
restricted stock awards. On December 2, 2008, the Board of Directors authorized
the addition of another 1,000,000 shares to the 2007 Plan. Since that date, the
number of authorized options under the 2007 Plan has not
increased. In the fiscal year ended September 30, 2009, we issued
1,379,000 options under the 2007 Plan to our directors, officers and employees,
and 60,000 options were issued to consultants, all of which are subject to
vesting provisions.
The 2007
Plan authorizes us to grant (i) to key employees incentive stock options
and non-qualified stock options and restricted stock awards and (ii) to
non-employee directors and consultants non-qualified stock options and
restricted stock. Our Compensation Committee will administer the Plans by making
recommendations to the board or determinations regarding the persons to whom
options or restricted stock should be granted and the amount, terms, conditions
and restrictions of the awards.
The 2007
Plan allows for the grant of incentive stock options, non-qualified stock
options and restricted stock awards. Incentive stock options granted under the
2007 Plan must have an exercise price at least equal to one hundred percent
(100%) of the fair market value of the common stock as of the date of grant.
Incentive stock options granted to any person who owns, immediately after the
grant, stock possessing more than ten percent (10%) of the combined voting power
of all classes of our stock, or of any parent or subsidiary corporation, must
have an exercise price at least equal to one hundred ten percent (110%) of the
fair market value of the common stock on the date of grant. Non-statutory stock
options may have exercise prices as determined by our Compensation Committee. To
date, no incentive stock options have been granted under the Plan.
The
Compensation Committee is also authorized to grant restricted stock awards under
the 2007 Plan. A restricted stock award is a grant of shares of the common stock
that is subject to restrictions on transferability, risk of forfeiture and other
restrictions and that may be forfeited in the event of certain terminations of
employment or service prior to the end of a restricted period specified by the
Compensation Committee.
Compensation
of Directors
J.B.
Smith and Rocco DelMonaco were appointed to our Board of Directors on September
17, 2008. Each received options to purchase 100,000 shares of our common stock
for $1.05 per share. The options become exercisable on September 17, 2009 and
expire on September 17, 2018. Joseph Nirta was appointed to our Board
on October 20, 2008 and received options to purchase 100,000 of our common stock
for $1.04 per share and which expire on October 20, 2018.
Director
Compensation for fiscal year 2009
Change in
|
||||||||||||||||||||||||||||
Pension
Value
|
||||||||||||||||||||||||||||
and
|
||||||||||||||||||||||||||||
Fees
|
Nonqualified
|
|||||||||||||||||||||||||||
Earned
|
Non-Equity
|
Deferred
|
||||||||||||||||||||||||||
Or
Paid
|
Stock
|
Option
|
Incentive
Plan
|
Compensation
|
All
Other
|
|||||||||||||||||||||||
in
Cash
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
||||||||||||||||||||||
Name
(a)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||||||||
Richard
D. Stromback (1)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
(1)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
|||||||||||||
J.B.
Smith (2)
|
$
|
-0-
|
$
|
-0-
|
$
|
76,971
|
(2)
|
$
|
-0-
|
$
|
-0-
|
$
|
453,259
|
(8)
|
$
|
530,230
|
||||||||||||
Rocco
DelMonaco (3)
|
$
|
-0-
|
$
|
-0-
|
$
|
76,971
|
(3)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
76,971
|
|||||||||||||
Joseph
Nirta (7)
|
$
|
-0-
|
$
|
-0-
|
$
|
70,483
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
70,483
|
||||||||||||||
F.
Thomas Krotine (4)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
(5)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
|||||||||||||
Robert
W. Liebig (5)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
(6)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
|||||||||||||
Donald
Campion (6)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
(7)
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
56
(1)
|
Mr. Stromback
had 10,000 outstanding vested option awards at an exercise price of $2.00
per share at fiscal year end 2009. These options expire on
March 1, 2017. He resigned as a director on October 1,
2009.
|
|||
(2)
|
Reflects
compensation paid to Sales Attack, LLC, a company wholly-owned by Equity
11. Mr. Smith is a principal in Equity 11. Of this amount, $29,333 was
paid in cash while the remainder, $423,926 reflects the value of options
awarded to Sales Attack. Mr. Smith had 100,000 outstanding
vested option awards at an exercise price of $1.05 per share at fiscal
year end 2009. These options expire on September 17,
2018.
|
|||
(3)
|
Mr.
DelMonaco had 100,000 outstanding vested option awards at an exercise
price of $1.05 per share at fiscal year end 2009. These options
expire on September 17, 2018.
|
|||
(4)
|
Mr. Krotine
had the following options outstanding at fiscal year end
2009:
· 80,237
outstanding vested options at an exercise price of $.85 per share which
expire on November 1, 2016
· 10,000
outstanding vested option awards at an exercise price of $1.00 per share
which expire on March 1, 2017
· 240,982
outstanding unvested option awards at an exercise price of $.85 per share
which expire on November 1, 2016
· 169,000
outstanding unvested options at an exercise price of $.51 per share which
expire on September 21, 2019.
Mr.
Krotine resigned as a director on September 15, 2008.
|
|||
(5)
|
Mr. Liebig
had 100,000 outstanding option awards at fiscal year end 2008. He resigned
on July 24, 2008.
|
|||
(6)
|
Mr. Campion
had 100,000 outstanding option awards at fiscal year end 2008. He resigned
on July 13, 2008.
|
|||
(7)
|
Mr.
Nirta had 100,000 outstanding option awards at fiscal year end 2009. He
was appointed a director on October 20,
2008.
|
Mr.
Stromback did not receive any compensation in 2008 for serving as
Chairman. Mr. Stromback resigned as a director on October 1,
2009.
Mr.
Smith, a non-employee director, received 100,000 options in 2008 for serving as
a director. All of his compensation is disclosed in the Director
Compensation Table.
Mr.
DelMonaco, a non-employee director, received 100,000 options in 2008 for serving
as a director. All of his compensation is disclosed in the Director
Compensation Table.
Mr.
Krotine did not receive any compensation in 2008 for serving on the Board of
Directors. He resigned as a director on September 15, 2008.
Mr.
Morgan resigned as a director on September 15, 2008 and from his employment on
March 26, 2009. He did not receive any compensation in 2008 for
serving on the Board of Directors.
57
Mr.
Liebig, a non-employee director, did not receive any compensation in 2008 for
serving as a director. He resigned on July 24, 2008.
Mr.
Campion, a non-employee director, did not receive any compensation in 2008 for
serving as a director. He resigned on July 13, 2008.
Employment
Contracts; Termination of Employment and Change-in-Control
Arrangements
Effective
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett, under which he serves as the Chief Executive
Officer. Mr. Crockett reports to the Chairman of the
Board of Directors. Mr. Crockett receives an annual base salary
of $200,000. The Compensation Committee of the Board of Directors may review Mr.
Crockett’s salary to determine what, if any, increases shall be made
thereto. The Crockett Agreement may be terminated prior to the end of
the term by us for cause. If Mr. Crockett’s employment is terminated
without cause or for “good reason,” as defined in the Crockett Agreement, he is
entitled to 50% of salary that would have been paid over the balance of the term
of the Crockett Agreement. Further, a termination within one year after a
change in control shall be deemed to be a termination without
cause.
On
September 21, 2009, we entered into an employment agreement with F. Thomas
Krotine (the “Krotine Agreement”), our COO. The Krotine Agreement is deemed
effective September 21, 2009 (the “Effective Date”) and shall expire on
September 21, 2010. Effective November 1, 2009, Mr. Krotine receives an
annual base salary of $65,000. The Compensation Committee of the Board of
Directors may review Mr. Krotine’s salary to determine what, if any, increases
shall be made thereto. The Krotine Agreement may be terminated prior to the end
of the term by us for cause. If Mr. Krotine’s employment is terminated
without cause or for “good reason,” as defined in the Krotine Agreement, he is
entitled to 50% of salary that would have been paid over the balance of the term
of the Krotine Agreement. Further, a termination within one year of a change in
control shall be deemed to be a termination without cause.
On
September 21, 2009, we entered into an employment agreement with Daniel V.
Iannotti (the “Iannotti Agreement”), our Vice President, General Counsel &
Secretary. Mr. Iannotti has served as our Vice President, General
Counsel since August 11, 2008. The Iannotti Agreement is deemed effective
September 21, 2009 (the “Effective Date”) and shall expire on September 21,
2012. Effective November 1, 2009, Mr. Iannotti receives an annual base
salary of $150,000. The Compensation Committee of the Board of Directors may
review Mr. Iannotti’s salary to determine what, if any, increases shall be made
thereto. The Iannotti Agreement may be terminated prior to the end of the term
by us for cause. If Mr. Iannotti’s employment is terminated without
cause or for “good reason,” as defined in the Iannotti Agreement, he is entitled
to 50% of salary that would have been paid over the balance of the term of the
Iannotti Agreement. Further, a termination within one year after a change
in control shall be deemed to be a termination without cause.
Kevin Stolz
serves as Chief Financial Officer, Controller and Chief Accounting Officer under
an agreement with us effective February 1, 2007. The agreement
was executed on February 1, 2008 and was terminated on July 28, 2009 and Mr.
Stolz continues to serve on an at-will basis. He reports to the Chief Executive
Officer.
Sally
J.W. Ramsey serves as the Director of Research and Development and New Product
Development. Her employment agreement is for a term of five years
from January 1, 2007 through January 1, 2012. Her salary
for the first year is $180,000, then $200,000 for years two through four, and
finally $220,000 for year five but it was reduced to $60,000 effective December
1, 2008. She reports to the Chief Executive Officer. On
September 21, 2009, we entered into a Second Amendment To Employment Agreement
with Sally J.W. Ramsey which amends Section 4.1 of her Employment Agreement with
us to provide for an annual salary of $75,000 effective November 1, 2009.
Ms. Ramsey’s agreement is renewable for one year at our option unless either
party gives written notice to the other party that it does not wish to extend
the agreement. The agreement may be terminated prior to the end of
the term by us for cause, good reason, or upon thirty days
written notice given to the other party. If the executive’s
employment is terminated without cause or for “good reason,” as defined in their
employment agreements, the executive is entitled to the amount of salary that
would have been paid over the balance of the term of the agreement and will
receive it over such period. Further, upon a change in control other
than with Equity 11, we must pay the executive’s annual salary that would be
payable for a twenty-four month period and any declared and accrued, but as
of then unpaid, bonus or stock options grant, shall be deemed to be
vested.
58
On August
27, 2008, the terms of the employment agreements of Messrs. Stromback, Krotine,
Morgan, Stolz were amended so the Equity 11 transaction was not a “change in
control” under the terms of those then existing employment
agreements.
The
following table identifies the payments and obligations made by us to the
selling shareholder, an affiliate of the selling shareholder or any person with
whom the selling shareholder has a contractual relationship regarding the
selling shareholder’s investment in Ecology Coatings or the sale of common
shares under this registration statement for the past three years up to and
including the year following the sale of preferred stock:
Payment Entity
|
Purpose
|
Payment Amount
|
Frequency
|
Termination Date
|
Total Payments Made
|
Total Payments Remaining
|
Seven
Industries, Ltd. (4)
|
Office
Rent
|
$2,951.76
|
Monthly
|
September
20, 2010
|
$25,591.60(2)
|
$25,072.11
|
Sales
Attack LC (5)
|
Marketing
& Sales Consulting Services
|
1)
$20,000 per month
2)
Stock options to purchase 531,000 shares at $1.05 per share
3)
Sales commission of 15% of royalties and 3% of product
sales
|
$20,000
Monthly
|
May
15, 2009
|
$169,333(1)
|
$0
|
Jim
Juliano (6)
|
Financial
|
$7,500
|
Monthly
|
May
15, 2009
|
$37,500
(2)
|
$0
|
Seven
Industries, Ltd. (7)
|
Promissory
Notes
|
$54,000
|
One-Time
|
May
15, 2009
|
$54,337
(3)
|
$0
|
JB
Smith LC (8)
|
Promissory
Note
|
$7,000
|
One-Time
|
Terminated
|
$7,010
(3)
|
$0
|
Equity
11
|
Purchase
of office furniture
|
$5,832.12
|
One-Time
|
November
14, 2008
|
$5,832.12
|
$0
|
JB
Smith LC (9)
|
Promissory
Note
|
$7,716.40
|
One-Time
|
15
days after demand for payment
|
$0
|
$7,812.59
|
Equity
11
|
Convertible
Preferred Shares Dividends
|
December
1, 2009
|
One-Time
|
If
not converted prior to dividend date
|
$121,800
(11)
|
|
Equity
11
|
Convertible
Preferred Shares Dividends
|
June
1, 2010
|
One-Time
|
If
not converted prior to dividend date
|
$121,800
(11)
|
|
Equity
11 (10)
|
Convertible
Preferred Shares Dividends
|
December
1, 2010
|
One-Time
|
If
not converted prior to dividend date
|
$121,800
(11)
|
|
Equity
11
|
Convertible
Preferred Shares, Series B Dividends
|
December
1, 2009
|
One-Time
|
If
not converted prior to dividend date
|
$10,975(11)
|
|
Equity
11
|
Convertible
Preferred Shares, Series B Dividends
|
June
1, 2010
|
One-Time
|
If
not converted prior to dividend date
|
$10,975(11)
|
|
Equity
11 (10)
|
Convertible
Preferred Shares, Series B Dividends
|
December
1, 2010
|
One-Time
|
If
not converted prior to dividend date
|
$10,975(11)
|
|
JB
Smith LC
|
$6500
Promissory Note
|
September
10, 2009
|
One-Time
|
15
days after demand for payment
|
$0
|
$6,518
|
EQUITY
11 TOTAL:
|
$299,603.72
|
$426,752.70
|
||||
(1)
|
Includes
cash payments of $69,333 and issuance of $100,000 in Convertible Preferred
Securities, Series B. The May 15, 2009 Convertible Preferred
Securities Agreement is attached as an exhibit to our Amendment No. 2 to
this S-1 registration statement filed with the SEC on October 20,
2009.
|
(2)
|
Paid
through the issuance of Convertible Preferred Securities, Series
B.
|
(3)
|
Includes
accrued interest; paid through the issuance of Convertible Preferred
Securities, Series B.
|
(4)
|
The
Office Sublease is filed as an exhibit to our Amendment No. 2 to this S-1
registration statement filed with the SEC on October 20,
2009.
|
(5)
|
The
September 17, 2008 Consulting Agreement with Sales Attack LLC is filed as
an exhibit to our Amendment No. 2 to this S-1 registration statement filed
with the SEC on October 20, 2009. The $20,000 monthly
obligation under this Agreement was terminated on May 15,
2009.
|
(6)
|
Mr.
Juliano’s Consulting Agreement is filed as an exhibit to our Amendment No.
2 to this S-1 registration statement filed with SEC on October 20,
2009.
|
(7)
|
These
promissory notes are filed as exhibits to our Amendment No. 2 to this S-1
registration statement filed with the SEC on October 20,
2009.
|
(8)
|
This
promissory note is filed as an exhibit to our Amendment No. 2 to this S-1
registration statement filed with the SEC on October 20,
2009.
|
(9)
|
This
promissory note is filed as an exhibit to our Amendment No. 2 to this S-1
registration statement filed with the SEC on October 20,
2009.
|
(10)
|
We
have assumed that the Equity 11 will convert these preferred shares to
common stock prior to the next scheduled dividend
date.
|
(11)
|
We
have shown dividend payments for preferred shares until December 1, 2010
but these dividends payments will continue after this date unless the
Equity 11 converts the preferred shares to common stock. We
have shown dividend payments for Series B preferred shares based on the
number of Series B preferred owned by the Equity 11 as of August 1,
2009. Dividend payments for Series B preferred shares will
continue after December 1, 2010 unless the Equity 11 converts the
preferred shares to common stock.
|
59
Equity
11, its affiliates and all persons who have a contractual relationship with the
Equity 11 have not had any prior transactions with us other than the
transactions described in the table above and the August 28, 2008 Securities
Purchase Agreement and the May 15, 2009 Convertible Preferred Securities
Agreement.
On August
12, 2008, one of our outside law firms, Butzel Long PC entered into an
Investigation Services Agreement with Stealth Investigations, LLC for
investigative services associated with the departure of our prior general
counsel, Adam Tracy. Stealth Investigations, LLC is owned by J.B.
Smith, the managing partner of Equity 11 and one of our Directors. At
September 30, 2009, we owed $6,711 to Butzel Long for these
services. This amount is included in the accounts payable balance
shown on the consolidated balance sheets included in this
prospectus.
On
September 17, 2008, we entered into a Consulting Agreement with RJS
Consulting LLC (“RJS”). RJS is wholly owned by our former Chairman,
Richard D. Stromback. Under the Agreement, RJS will provide
directorship services and services relating to generating new
revenue. RJS will be paid $16,000/month. In addition, RJS will be
paid based on new revenue generated from RJS’s efforts — 15% of collected new
gross licensing and royalty revenue and 3% of new collected gross revenue from
product sales. To date, we have not paid any commissions under this
Agreement. We will also reimburse RJS for various event, legal,
office and IT costs. We paid $2,700 under this agreement in fiscal
year 2008 and $107,884.35 in fiscal year 2009. Additionally, we paid
$45,269.51 under this agreement on October 1, 2009 in connection with SAC’s
$240,000 investment in us on that date (we netted $120,000).
On
September 17, 2008, we entered into a Consulting Agreement with DAS
Ventures LLC (“DAS”). DAS is wholly owned by the brother of our
Chairman (Richard D. Stromback), Douglas Stromback, who is also a
shareholder. Under the Agreement, DAS will provide services relating
to generating new revenue. DAS will be paid based on new revenue
generated from DAS’s efforts — 15% of collected gross licensing and royalty
revenue and 3% of collected gross revenue from product sales. To
date, we have not paid any commissions under this Agreement.
On
September 17, 2008, we entered into a Consulting Agreement with Sales
Attack LC (“Sales Attack”). Sales Attack is wholly owned by J.B.
Smith, a member of our Board of Directors and owner of Equity 11, Ltd., the
holder of our 5% convertible preferred shares. Under the Agreement,
Sales Attack will receive 15% of collected gross licensing and
royalty revenue generated from Sales Attack’s efforts and 3% of
collected gross revenue from product sales. The agreement also
included a monthly payment of $20,000 but that provision was terminated
effective May 15, 2009. To date, we have not paid any commissions
under this Agreement.
On
September 30, 2008, we entered into a lease for office space for its
headquarters in Auburn Hills, MI with Seven Industries, Ltd.. The
lease specifies average monthly rent of $2,997. Seven Industries,
Ltd. is wholly owned by J.B. Smith. Mr. Smith is the managing partner
of Equity 11. We have entered into a Securities Purchase Agreement
with Equity 11and Equity 11 has the right to designate three of the five members
of our Directors.
We had
unsecured notes payable to Seven Industries, a company that is wholly owned by
J.B. Smith, a member of our Board of Directors and managing partner of Equity 11
outstanding during the year ending September 30, 2009. The notes bore
interest at 5% per annum with principal and interest due at June 30,
2009. The highest principal and interest balance on these notes was
$54,985 on May 15, 2009. The notes and accrued interest could be
converted into shares of our common stock at $.66 per share at the sole
discretion of the note holder. The notes and the accrued interest
then outstanding were paid off through the issuance of Convertible Preferred
Shares, Series B, on May 15, 2009.
60
From
November of 2003 through September 30, 2006, Richard D. Stromback incurred
expenses for which he was not reimbursed. The balance at
September 30, 2009 was $49,190. The highest aggregate amount
owed to him during the fiscal year ended September 30, 2009 was
$49,190. We made no payments on this balance during the fiscal year
ended September 30, 2009. It was paid in full on October 1,
2009.
On
December 15, 2003, we entered into a promissory note with Deanna Stromback,
the sister of Richard D. Stromback and a former director, under which it
borrowed a total of $173,030. The note bears interest at the rate of
4% per annum and is due and payable on December 31, 2009. She
converted $27,500 of the principal amount of the note into 3,000,000 shares of
common stock on March 1, 2005. At September 30, 2009, the
outstanding principal balance of this note was $110,500 plus accrued interest of
$13,235. No payments of principal and/or interest were made on this
note during the fiscal year ended September 30, 2009. During the
fiscal year ended September 30, 2009, the highest principal amount owed on
this note was $110,500. On February 25, 2009, this maturity date for
this note was extended until December 31, 2009.
On
August 10, 2004, we entered into a promissory note with Douglas Stromback,
the brother of Richard D. Stromback and Deanna Stromback and a former director,
under which it borrowed a total of $200,000. He converted $27,500 of
the principal amount into 3,000,000 shares of common stock on March 1,
2005. The note bears interest at the rate of 4% per annum and is due
and payable on December 31, 2009. At September 30, 2009 the
outstanding principal balance of this note was $133,000 plus accrued interest of
$15,936. No payments of principal and/or interest were made on this
note during the fiscal year ended September 30, 2009. During the
fiscal year ended September 30, 2009, the highest principal amount owed on
this note was $133,000. On February 24, 2009, this maturity date for
this note was extended until December 31, 2009.
On
November 11, 2008, we settled our lawsuit against Trimax Gaming, LLC and
Daryl Repokis pending in Oakland County Circuit Court, Pontiac,
Michigan. We entered into a new, one year Consulting Services
Agreement with Trimax, LLC (“Trimax”). According to our records,
Trimax beneficially owns at least 5% of our common stock. Under the
agreement, Trimax will provide services to generate new revenue for us. Trimax
will be paid $7,500/month. In addition, Trimax will be paid based on
new revenue generated from Trimax’s efforts — 15% of collected new gross
licensing and royalty revenue and 3% of new collected gross revenue from product
sales. This agreement was terminated in March 2009.
On
September 10, 2009, we executed a promissory note in favor of Sky Blue Ventures,
LLC (“Sky Blue”) in the principal amount of Six Thousand Five Hundred Dollars
($6,500) bearing interest at five percent (5%) per annum. The note is
payable in full within 15 days written demand from Sky Blue. Sky Blue
is 65% owned by J.B. Smith, one of our directors and the managing partner
of Equity 11, Ltd. which holds shares of our 5% Convertible Preferred
Shares and 5% Convertible Preferred Shares, Series B. Sky Blue, at
its option, may demand payment of all amounts owed under the note within fifteen
(15) days following our completion of either (i) an underwritten
public offering of its securities or (ii) a private offering exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended
which results in proceeds, net of underwriting discounts and commissions, in
excess of One Million Dollars ($1,000,000) (“New Offering”). The amounts due
under the note may also be accelerated upon an event of default or converted
into common shares upon our completing a New Offering. At
September 30, 2009, the outstanding amount balance of this note was $6,518,
including $18 of accrued interest. No payments of principal and/or
interest were made on this note during the fiscal year ended September 30,
2009.
On May 5,
2009, we entered into a promissory note with JB Smith LC, which is an affiliate
of the Equity 11 and controlled by JB Smith, a director on our Board of
Directors, under which we borrowed a total of $7,000. The note bears
interest at the rate of 5% per annum and is due and payable on fifteen (15) days
written notice from JB Smith LC. At September 30, 2009, the
outstanding principal balance of this note was $0. This note was
converted into our common stock on May 15, 2009 at a conversion price of $.08
per share.
61
On August
11, 2009, we executed a promissory note in favor JB Smith LC dated July 1, 2009
in the principal amount of Seven Thousand Seven Hundred Sixteen Dollars and
Forty Cents ($7,716.40) bearing interest at five percent (5%) per
annum. The note is payable in full within 15 days written demand from
JB Smith LC. JB Smith LC is wholly owned by J.B. Smith, one of our
directors and the managing partner of Equity 11, Ltd. which holds shares of our
5% Convertible Preferred Shares and 5% Convertible Preferred Shares, Series
B. JB Smith LC, at its option, may demand payment of all amounts owed
under the note within fifteen (15) days following our completion of either
(i) an underwritten public offering of its securities or (ii) a
private offering exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, which results in proceeds, net of
underwriting discounts and commissions, in excess of One Million Dollars
($1,000,000) (“New Offering”). The amounts due under the note may also be
accelerated upon an event of default or converted into common shares upon our
completing a New Offering. At
September 30, 2009, the outstanding balance of this note was $7,813,
including $96 of accrued interest. No payments of principal and/or
interest were made on this note during the fiscal year ended September 30,
2009.
On July
28, 2009, we and Kevin P. Stolz, our Chief Financial and Accounting Officer,
agreed to terminate Mr. Stolz’s Employment Agreement dated February 1,
2008. Mr. Stolz remains employed by us in his current
capacity. Effective September 1, 2009, Mr. Stolz’s salary was reduced
to $42,000 per year and he receives $1,000 per month for medical insurance in
lieu of participating in our medical plan. Mr. Stolz also received
an additional stock option award to purchase 40,000 shares of our common stock
at $1 per share.
On
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett (the “Crockett Agreement”), our CEO. Mr. Crockett has served as our CEO
since September 15, 2008. The Crockett Agreement is deemed effective September
21, 2009 (the “Effective Date”) and will expire on September 21, 2012.
Mr. Crockett receives an annual base salary of $200,000. The Compensation
Committee of the Board of Directors may review Mr. Crockett’s salary to
determine what, if any, increases shall be made thereto. In addition, the
vesting for Mr. Crockett’s previously awarded stock options was adjusted so that
110,000 stock options will vest on each of 12 months, 18 months and 24 months
from Mr. Crockett’s initial date of employment (September 15, 2008) and the
re-set strike price for such options to $.51 per
share. Mr. Crockett was also granted stock options to purchase
670,000 shares of our common stock, one-quarter of which shall vest at each of
30, 36, 42 and 48 months from Mr. Crockett’s initial date of employment with us
(September 15, 2008) with an exercise price of $.51 per share. The Crockett
Agreement may be terminated prior to the end of the term by us for
cause. If Mr. Crockett’s employment is terminated without cause
or for “good reason,” as defined in the Crockett Agreement, he is entitled to
50% of salary that would have been paid over the balance of the term of the
Crockett Agreement. Further, a termination within one year after a change
in control shall be deemed to be a termination without cause.
On
September 21, 2009, we entered into an employment agreement with Daniel V.
Iannotti (the “Iannotti Agreement”), our Vice President, General Counsel &
Secretary. Mr. Iannotti has served as our Vice President, General Counsel
since August 11, 2008. The Iannotti Agreement is deemed effective September 21,
2009 (the “Effective Date”) and shall expire on September 21, 2012. Effective
November 1, 2009, Mr. Iannotti receives an annual base salary of $150,000.
The Compensation Committee of the Board of Directors may review Mr. Iannotti’s
salary to determine what, if any, increases shall be made thereto. In addition,
the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so
that 110,000 stock options will vest on each of 12 months, 18 months and 24
months from Mr. Iannotti’s initial date of employment (August 11,
2008). Mr. Iannotti was also granted stock options to purchase
70,000 shares of our common stock, one-quarter of which shall vest at each of
30, 36, 42 and 48 months from Mr. Iannotti’s’s initial date of employment with
us (August 11, 2008) with an exercise price of $.51 per share. The Iannotti
Agreement may be terminated prior to the end of the term by us for cause.
If Mr. Iannotti’s employment is terminated without cause or for “good
reason,” as defined in the Iannotti Agreement, he is entitled to 50% of salary
that would have been paid over the balance of the term of the Iannotti
Agreement. Further, a termination within one year after a change in control
shall be deemed to be a termination without cause.
62
On
September 21, 2009, we entered into an employment agreement with F. Thomas
Krotine (the “Krotine Agreement”), our COO. The Krotine Agreement is deemed
effective September 21, 2009 (the “Effective Date”) and shall expire on
September 21, 2010. Effective November 1, 2009, Mr. Krotine will receive an
annual base salary of $65,000. The Compensation Committee of the Board of
Directors may review Mr. Krotine’s salary to determine what, if any, increases
shall be made thereto. Mr. Krotine was also granted stock options to
purchase 169,000 shares of our common stock, one-quarter of which shall vest at
each of 6, 12, 18 and 24 months from September 21, 2009 with an exercise price
of $.51 per share. The Krotine Agreement may be terminated prior to the end of
the term by us for cause. If Mr. Krotine’s employment is terminated
without cause or for “good reason,” as defined in the Krotine Agreement, he is
entitled to 50% of salary that would have been paid over the balance of the term
of the Krotine Agreement. Further, a termination within one year of a change in
control shall be deemed to be a termination without cause.
On
September 21, 2009, we entered into a Second Amendment To Employment Agreement
with Sally J.W. Ramsey which amends Section 4.1 of her Employment Agreement with
us dated January 1, 2007 to provide for an annual salary of $75,000 effective
November 1, 2009. From December 15, 2008 until September 21, 2009, Ms.
Ramsey's annual salary was $60,000.
Mr.
DelMonaco is our only independent Director. Both our Audit Committee
and Compensation Committee Charters set forth the following to determine whether
a Director is independent: (1) the independence requirements of the
NASDAQ Stock Market, (2) a “non-employee director” within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended
(the “1934 Act”), and (3) be an “outside director” under the regulations
promulgated under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”).
63
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Ecology
Coatings, Inc.
We have
audited the accompanying consolidated balance sheets of Ecology Coatings, Inc.
and Subsidiary (the “Company”) as of September 30, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ecology Coatings, Inc. and
Subsidiary as of September 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 9 to
the consolidated financial statements, the Company’s recurring losses, negative
cash flows from operations and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management’s plans
as to these matters are also discussed in Note 9. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ UHY
LLP
Southfield,
Michigan
December
22, 2009
F-1
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||
Consolidated
Balance Sheets
|
||||||||
ASSETS
|
||||||||
September
30, 2009
|
September
30, 2008
|
|||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
-
|
$
|
974,276
|
||||
Prepaid
expenses
|
1,400
|
25,206
|
||||||
Total
Current Assets
|
1,400
|
999,482
|
||||||
Property
and Equipment
|
||||||||
Computer
equipment
|
30,111
|
22,933
|
||||||
Furniture
and fixtures
|
21,027
|
18,833
|
||||||
Test
equipment
|
9,696
|
7,313
|
||||||
Signs
|
213
|
213
|
||||||
Software
|
6,057
|
1,332
|
||||||
Video
|
48,177
|
48,177
|
||||||
Total
fixed assets
|
115,281
|
98,801
|
||||||
Less:
Accumulated depreciation
|
(48,609)
|
(22,634)
|
||||||
Property
and Equipment, net
|
66,672
|
76,167
|
||||||
Other
|
||||||||
Patents-net
|
443,465
|
421,214
|
||||||
Trademarks-net
|
6,637
|
5,029
|
||||||
Total
Other Assets
|
450,102
|
426,243
|
||||||
Total
Assets
|
$
|
518,174
|
$
|
1,501,892
|
See the
accompanying notes to the audited consolidated financial
statements.
F-2
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||
Consolidated
Balance Sheets
|
||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
September
30, 2009
|
September
30, 2008
|
|||||||
Current
Liabilities
|
||||||||
Bank
overdraft
|
$
|
200
|
$
|
-
|
||||
Accounts
payable
|
1,272,057
|
1,359,328
|
||||||
Credit
card payable
|
114,622
|
92,305
|
||||||
Accrued
liabilities
|
76,084
|
12,033
|
||||||
Franchise
tax payable
|
-
|
800
|
||||||
Interest
payable
|
189,051
|
133,332
|
||||||
Notes
payable
|
582,301
|
894,104
|
||||||
Notes
payable - related party
|
257,716
|
243,500
|
||||||
Preferred
dividends payable
|
36,800
|
6,300
|
||||||
Total
Current Liabilities
|
2,528,831
|
2,741,702
|
||||||
Total
Liabilities
|
2,528,831
|
2,741,702
|
||||||
Commitments
and Contingencies (Note 5)
|
||||||||
Stockholders'
Equity (Deficit)
|
||||||||
Preferred
Stock - 10,000,000 $.001 par value shares
|
||||||||
authorized;
3,002 and 2,010 shares issued and outstanding
|
||||||||
as
of September 30, 2009 and September 30, 2008, respectively
|
2
|
2
|
||||||
Common
Stock - 90,000,000 $.001 par value shares
|
||||||||
authorized;
32,835,684 and 32,210,684
|
||||||||
outstanding
as of September 30, 2009 and
|
||||||||
September
30, 2008, respectively
|
32,859
|
32,234
|
||||||
Additional
paid in capital
|
20,645,229
|
13,637,160
|
||||||
Accumulated
Deficit
|
(22,688,817
|
)
|
(14,909,206
|
)
|
||||
Total
Stockholders' Equity (Deficit)
|
(2,010,657
|
)
|
(1,239,810
|
)
|
||||
Total
Liabilities and Stockholders'
|
||||||||
Equity
(Deficit)
|
$
|
518,174
|
$
|
1,501,892
|
See the
accompanying notes to the audited consolidated financial
statements.
F-3
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||
Consolidated
Statements of Operations
|
||||||||
For
the Year Ended
|
For
the Year Ended
|
|||||||
September
30, 2009
|
September
30, 2008
|
|||||||
Revenues
|
$
|
-
|
$
|
25,092
|
||||
Salaries
and fringe benefits
|
1,481,111
|
2,006,776
|
||||||
Professional
fees
|
3,101,606
|
2,735,360
|
||||||
Other
general and administrative costs
|
327,757
|
637,668
|
||||||
Operating
Loss
|
(4,910,474
|
)
|
(5,354,712
|
)
|
||||
Other
Income (Expenses)
|
||||||||
Interest
income
|
142
|
5,784
|
||||||
Interest
expense
|
(271,860
|
)
|
(1,421,394
|
)
|
||||
Total
Other (Expenses), net
|
(271,718
|
)
|
(1,415,610
|
)
|
||||
Net
Loss
|
$
|
(5,182,192
|
)
|
$
|
(6,770,322
|
)
|
||
Basic
and diluted net loss per share
|
$
|
(0.16
|
)
|
$
|
(0.21
|
)
|
||
Basic
and diluted weighted average of
|
||||||||
common
shares outstanding
|
32,330,547
|
32,189,864
|
See the
accompanying notes to the audited consolidated financial
statements.
F-4
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
|||||||||||||||||||||||||||
Statement
of Changes in Shareholders’ Equity (Deficit) for the Years Ended
September 30, 2009 and 2008
|
|||||||||||||||||||||||||||
Additional
|
Total
|
||||||||||||||||||||||||||
Paid
In
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||||||
Common
Stock
|
Preferred
Stock
|
Capital
|
Deficit
|
Equity
|
|||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
(Deficit)
|
|||||||||||||||||||||||
Balance
at October 1, 2007
|
32,150,684
|
$
|
32,174
|
-
|
$
|
-
|
$
|
6,165,282
|
$
|
(5,907,169
|
)
|
$
|
290,287
|
||||||||||||||
Issuance
of stock for debt extension
|
60,000
|
60
|
-
|
-
|
161,940
|
-
|
162,000
|
||||||||||||||||||||
Issuance
of warrants for debt extension
|
-
|
-
|
-
|
-
|
26,343
|
-
|
26,343
|
||||||||||||||||||||
Issuance
of preferred stock
|
-
|
2,010
|
2
|
1,500,585
|
-
|
1,500,585
|
|||||||||||||||||||||
Beneficial
conversion feature on preferred stock
|
-
|
-
|
-
|
-
|
2,225,415
|
(2,225,415
|
)
|
-
|
|||||||||||||||||||
Warrants
issued with preferred stock
|
-
|
-
|
-
|
-
|
509,415
|
-
|
509,415
|
||||||||||||||||||||
Beneficial
conversion feature on debt
|
-
|
-
|
-
|
-
|
358,654
|
-
|
358,654
|
||||||||||||||||||||
Stock
option expense
|
-
|
-
|
-
|
-
|
1,847,639
|
-
|
1,847,639
|
||||||||||||||||||||
Warrants
issued with debt
|
-
|
-
|
-
|
-
|
841,887
|
-
|
841,887
|
||||||||||||||||||||
Preferred
dividends
|
-
|
-
|
-
|
-
|
-
|
(6,300
|
)
|
(6,300)
|
|||||||||||||||||||
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
(6,770,322
|
)
|
(6,770,322)
|
|||||||||||||||||||
Balance
at September 30, 2008
|
32,210,684
|
$
|
32,234
|
2,010
|
$
|
2
|
$
|
13,637,160
|
$
|
(14,909,206
|
)
|
$
|
(1,239,810)
|
||||||||||||||
Issuance
of preferred stock
|
913
|
-
|
867,970
|
867,970
|
|||||||||||||||||||||||
Beneficial
conversion feature on preferred stock
|
2,488,011
|
(2,488,011)
|
-
|
||||||||||||||||||||||||
Warrants
issued with preferred stock
|
45,530
|
45,530
|
|||||||||||||||||||||||||
Stock
option expense
|
3,182,773
|
3,182,773
|
|||||||||||||||||||||||||
Beneficial
conversion feature on issuance of debt
|
2,061
|
2,061
|
|||||||||||||||||||||||||
Warrants
issued with debt
|
63,511
|
63,511
|
|||||||||||||||||||||||||
Stock
issued for services
|
575,000
|
575
|
254,425
|
255,000
|
|||||||||||||||||||||||
Stock
options exercised
|
50,000
|
50
|
24,950
|
25,000
|
|||||||||||||||||||||||
Preferred
dividends
|
79
|
-
|
78,908
|
(109,408)
|
(30,500)
|
||||||||||||||||||||||
Net
Loss
|
(5,182,192)
|
(5,182,192)
|
|||||||||||||||||||||||||
Balance
at September 30, 2009
|
32,835,684
|
$
|
32,859
|
3,002
|
$
|
2
|
20,645,299
|
(22,688,817)
|
(2,010,657)
|
See the
accompanying notes to the audited consolidated financial
statements.
F-5
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||
Consolidated
Statements of Cash Flows
|
||||||||
For
the Year
|
For
the Year
|
|||||||
Ended
|
Ended
|
|||||||
September
30, 2009
|
September
30, 2008
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net loss
|
$
|
(5,182,192
|
)
|
$
|
(6,770,322
|
)
|
||
Adjustments
to reconcile net loss
|
||||||||
to
net cash (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
45,075
|
37,486
|
||||||
Option
expense
|
3,182,773
|
1,847,639
|
||||||
Beneficial
conversion expense
|
2,062
|
374,476
|
||||||
Issuance
of stock for debt extension
|
162,000
|
|||||||
Issuance
of stock for payment of payables
|
200,000
|
-
|
||||||
Issuance
of stock for services
|
55,000
|
-
|
||||||
Warrants
|
63,512
|
868,231
|
||||||
Changes
in Asset and Liabilities
|
||||||||
Miscellaneous
receivable
|
-
|
1,118
|
||||||
Prepaid
expenses
|
23,806
|
45,683
|
||||||
Accounts
payable
|
(87,271
|
)
|
929,539
|
|||||
Accrued
payroll taxes and wages
|
-
|
(13,960
|
)
|
|||||
Accrued
liabilities
|
64,050
|
12,033
|
||||||
Franchise
tax payable
|
(800
|
)
|
||||||
Credit
card payable
|
22,317
|
77,533
|
||||||
Interest
payable
|
55,718
|
117,481
|
||||||
Deferred
revenue
|
-
|
(24,884
|
)
|
|||||
Net
Cash Used in Operating Activities
|
(1,555,950
|
)
|
(2,335,947
|
)
|
||||
INVESTING
ACTIVITIES
|
||||||||
Purchase
of fixed assets
|
(16,480
|
)
|
(77,094
|
)
|
||||
Purchase
of intangibles
|
(42,961
|
)
|
(138,848
|
)
|
||||
Net
Cash Used in Investing Activities
|
(59,441
|
)
|
(215,942
|
)
|
||||
FINANCING
ACTIVITIES
|
||||||||
Bank
overdraft
|
200
|
-
|
||||||
Repayment
of notes payable
|
(372,801
|
)
|
(591,998
|
)
|
||||
Proceeds
from notes payable and warrants
|
75,216
|
1,300,000
|
||||||
Issuance
of preferred stock
|
913,500
|
2,010,000
|
||||||
Issuance
of common stock
|
25,000
|
-
|
||||||
Net
Cash Provided by Financing Activities
|
641,115
|
2,718,002
|
||||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(974,276)
|
166,113
|
||||||
CASH
AND CASH EQUIVALENTS AT BEGINNING
|
||||||||
OF
PERIOD
|
974,276
|
808,163
|
||||||
CASH
AND CASH EQUIVALENTS AT END
|
||||||||
OF
PERIOD
|
$
|
-
|
$
|
974,276
|
See the
accompanying notes to the audited consolidated financial
statements.
F-6
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||
Consolidated
Statements of Cash Flows
|
||||||||
For
the Year
|
For
the Year
|
|||||||
Ended
|
Ended
|
|||||||
September
30, 2009
|
September
30, 2008
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
||||||||
INFORMATION
|
||||||||
Interest
paid
|
$
|
132,000
|
$
|
79,284
|
||||
Income
taxes paid
|
-
|
-
|
||||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH
|
||||||||
FINANCING
ACTIVITIES
|
||||||||
Issuance
of common stock for payment of accounts and notes payable
|
$
|
425,000
|
$
|
-
|
||||
Issuance
of common stock for services
|
$
|
15,000
|
$
|
-
|
||||
Issuance
of common stock for debt extension
|
$
|
-
|
$
|
162,000
|
See the
accompanying notes to the audited consolidated financial
statements.
F-7
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates
Description of
the Company. We were originally incorporated on March 12, 1990
in California (“Ecology-CA”). Our current entity was incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”). OCIS
completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the
Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings,
Inc. We develop nanotechnology-enabled, ultra-violet curable coatings
that are designed to drive efficiencies and clean processes in
manufacturing. We create proprietary coatings with unique performance
and environmental attributes by leveraging our platform of integrated
nano-material technologies that reduce overall energy consumption and offer a
marked decrease in drying time. Ecology’s target markets consist of electronics,
automotive and trucking, paper products and original equipment manufacturers
(“OEMs”).
Principles of
Consolidation. The consolidated financial statements include
all of our accounts and the accounts of our wholly owned subsidiary
Ecology-CA. All significant intercompany transactions have been
eliminated in consolidation.
Use of
Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts of assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash
Equivalents. We consider all highly liquid investments with
original maturities of three months or less to be cash and cash
equivalents.
Revenue
Recognition. Revenues from licensing contracts are recorded
ratably over the life of the contract. Contingency earnings such as
royalty fees are recorded when the amount can reasonably be determined and
collection is likely.
Loss Per
Share. Basic loss per share is computed by dividing the net
loss by the weighted average number of shares of common stock outstanding during
the period. Diluted loss per share is computed by dividing the net
loss by the weighted average number of shares of common stock and potentially
dilutive securities outstanding during the period. Potentially
dilutive shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants and the conversion of convertible debt
and convertible preferred stock. Potentially dilutive shares are excluded from
the weighted average number of shares if their effect is
anti-dilutive. We had a net loss for all periods presented herein;
therefore, none of the stock options and/or warrants outstanding or stock
associated with the convertible debt or with the convertible preferred shares
during each of the periods presented were included in the computation of diluted
loss per share as they were anti-dilutive. As of September 30, 2009
and 2008, there were 20,323,996 and 12,031,220 potentially dilutive shares
outstanding, respectively.
As of
September 30, 2009, there was $739,484 outstanding in principal and accrued
interest on notes held by Investment Hunter, LLC, George Resta and Mitchell
Shaheen. These notes are no longer convertible but we may grant
conversion rights to these holders to reduce our need for cash. To
the degree to which we grant conversion rights, these notes are potentially
dilutive.
Income Taxes and
Deferred Income Taxes. We use the asset and liability approach
for financial accounting and reporting for income taxes. Deferred
income taxes are provided for temporary differences in the bases of assets and
liabilities as reported for financial statement purposes and income tax purposes
and for the future use of net operating losses. We have recorded a
valuation allowance against the net deferred income tax asset. The
valuation allowance reduces deferred income tax assets to an amount that
represents management’s best estimate of the amount of such deferred income tax
assets that more likely than not will be realized. We cannot be
assured of future income to realize the net deferred income tax asset;
therefore, no deferred income tax asset has been recorded in the accompanying
consolidated financial statements.
F-8
As of September 30, 2009 and 2008, we
had no unrecognized tax benefits due to uncertain tax
positions.
Property and
Equipment. Property and equipment is stated at cost less
accumulated depreciation. Depreciation is recorded using the
straight-line method over the following useful lives:
Computer
equipment
|
3-10
years
|
|||
Furniture
and fixtures
|
3-7
years
|
|||
Test
equipment
|
5-7
years
|
|||
Software
Computer
|
3
years
|
|||
Marketing
and Promotional Video
|
3
years
|
Repairs
and maintenance costs are charged to operations as incurred. Betterments or
renewals are capitalized as incurred.
We review
long lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Patents. It
is our policy to capitalize costs associated with securing a
patent. Costs consist of legal and filing fees. Once a
patent is issued, it will be amortized on a straight-line basis over its
estimated useful life. Seven patents were issued as of September 30,
2009 and are being amortized over 8 years.
Stock-Based
Compensation. Employee and director stock-based compensation
expense is measured utilizing the fair-value method.
We
account for stock options granted to non-employees under the fair-value method
with stock-based compensation expense being charged to earnings on the earlier
of the date services are performed or a performance commitment
exists.
Expense
Categories. Salaries and Fringe Benefits of $1,481,111 and
$2,006,776 for the years ended September 30, 2009 and 2008, respectively,
include wages paid to and insurance benefits for our officers and employees as
well as stock based compensation expense for those
individuals. Professional fees of $3,101,606
and $2,735,360, for the years ended September 30, 2009
and 2008, respectively, include amounts paid to attorneys,
accountants, and consultants, as well as the stock based compensation expense
for those services. Of the $3,101,606 in professional fees incurred
in the year ended in September 30, 2009, $2,383,564 was for options
expense. Of this amount, $1,368,450 arose from the issuance of
warrants in November 2008 to Trimax to acquire 2,000,000 shares of our common
stock. Another approximate $360,000 arose from the issuance of stock
options to Sales Attack in September 2008 to acquire 531,000 shares of our
common stock.
Recent Accounting
Pronouncements
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, as amendment to SFAS No. 140 (SFAS166). SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. We will adopt SFAS 166 in fiscal 2010 as applicable. It would not have had
any impact on any of the financial statements that we’ve issued to
date.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (SFAS 167). SFAS 167 amends FASB Interpretation No. 46
(Revised December 2003), “Consolidation of Variable Interest Entities—an
interpretation of ARB No. 51,” (FIN 46(R)) to require an enterprise to
perform an analysis to determine whether the enterprise’s variable interest or
interests give it a controlling financial interest in a variable interest
entity; to require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity; to eliminate the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity; to add an additional reconsideration event for
determining whether an entity is a variable interest entity when any changes in
facts and circumstances occur such that holders of the equity investment at
risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly
impact the entity’s economic performance; and to require enhanced disclosures
that will provide users of financial statements with more transparent
information about an enterprise’s involvement in a variable interest entity.
SFAS 167 becomes effective on January 1, 2010. We do not anticipate SFAS
167 will have a material impact on our consolidated financial statements upon
adoption.
F-9
Note 2 — Concentrations
For the
years ended September 30, 2009 and 2008, we had no revenues
and revenues of $25,092, respectively. One customer
accounted for all of our revenues in the year ended September 30, 2008. As of
September 30, 2009 and 2008, there were no amounts due from this
customer.
We
occasionally maintain bank account balances in excess of the federally insurable
amount of $250,000. The Company had cash deposits in excess of these
limits on September 30, 2009 and September 30, 2008, of $0 and $724,276,
respectively.
Note
3 — Related Party Transactions
We have
borrowed funds for our operations from certain major stockholders, directors and
officers as disclosed below.
We have
an unsecured note payable due to Deanna Stromback, a principal shareholder and
former director and sister of our former Chairman, Rich Stromback, that bears
interest at 4% per annum with principal and interest due on December 31,
2009. As of September 30, 2009 and September 30, 2008, the note
had an outstanding balance of $110,500. The accrued interest on the
note was $13,235 and $8,407 as of September 30, 2009 and September 30,
2008, respectively. The note carries certain conversion rights that
allow the holder to convert all or part of the outstanding balance into shares
of our common stock upon mutually agreeable terms and conversion
price.
We have
an unsecured note payable due to Doug Stromback, a principal shareholder and
former director and brother of our former Chairman, Rich Stromback, that bears
interest at 4% per annum with principal and interest due on December 31,
2009. As of September 30, 2009 and September 30, 2008, the note
had an outstanding balance of $133,000. The accrued
interest on the note was $15,936 and $10,125 as of September 30, 2009
and September 30, 2008, respectively. The note carries certain
conversion rights that allow the holder to convert all or part of the
outstanding balance into shares of our common stock upon mutually agreeable
terms and conversion price.
We had an
unsecured note payable due to Rich Stromback, our former Chairman and a
principal shareholder, that bore interest at 4% per annum
with principal and interest due on December 31, 2009. As of September
30, 2009 and September 30, 2008, the note had an outstanding balance of $0.
The unpaid accrued interest on the note was $2,584 as of September 30, 2009 and
September 30, 2008, respectively. The note carries certain
conversion rights which allow the holder to convert all or part of the
outstanding balance into shares of our common stock upon mutually agreeable
terms and conversion price.
We have
an unsecured note payable to an entity controlled by JB Smith, a
director of the company. This note bears interest at 5% per annum and is
convertible under certain conditions. It is due within 15 days of demand by the
holder. As of September 30, 2009 and September 30, 2008, the
note had an outstanding balance of $7,716 and $0,
respectively. Accrued interest of $96 was outstanding of September
30, 2009.
We have
an unsecured note payable to an entity controlled by JB Smith, a director of the
company. This note bears interest at 5% per annum and is convertible under
certain conditions. It is due within 15 days of demand by the holder. As of
September 30, 2009 and September 30, 2008, the note had an
outstanding balance of $6,500 and $0, respectively. Accrued interest
of $18 was outstanding of September 30, 2009.
F-10
Future
maturities of related party long-term debt as of September 30, 2009 are as
follows:
12 Months Ended September
30,
|
||||
2010
|
$
|
257,716
|
||
We have a
payable to a Richard Stromback and an entity controlled by him totaling $145,191
and $63,775 as of September 30, 2009 and September 30, 2008,
respectively, included in accounts payable on the consolidated balance sheets.
See also Note 10—Subsequent Events
Note
4 — Notes Payable
We have
the following notes:
September
30,
2009
|
September
30, 2008
|
||||||
Chris
Marquez Note: Convertible note payable, 15% per annum interest
rate, principal and interest payment was due May 31, 2008; unsecured,
convertible at holder’s option into common shares of the Company at $1.60
per share. Accrued interest of $15,367 was outstanding at
September 30, 2008.
|
--
|
$
|
94,104
|
||||
George
Resta Note: Subordinated note payable, 25% per annum,
unsecured, principal and interest was due June 30, 2008; the Company
extended the maturity for 30 days, to July 30, 2008 in exchange for
warrants to purchase 15,000 shares of the Company’s common stock at $1.75
per share. Additionally, the Company granted the note holder warrants to
purchase 12,500 shares of the Company’s common stock at $1.75 per share.
On November 14, 2008, we agreed to pay the note holder $10,000 per month
until the principal and accrued interest is paid off. We made such
payments in October and November of 2008, but did not make payments
thereafter. Accrued interest of $9,232 and $7,329 was outstanding as of
September 30, 2009 and September 30, 2008, respectively.
|
38,744
|
|
50,000
|
||||
Investment
Hunter, LLC Note: Subordinated note payable, 25% per annum,
unsecured, principal and interest was due June 30, 2008; the Company
extended the maturity for 30 days, to July 30, 2008 in exchange for
warrants to purchase 15,000 shares of the Company’s common stock at $1.75
per share. Additionally, the Company granted the note holder warrants to
purchase 125,000 shares of the Company’s common stock at $1.75 per share.
On November 13, 2008, we agreed to pay the note holder $100,000 per month
until the principal and accrued interest is paid off. The payments for
October, November, and December were made, but none have been made
since. Accrued interest of $64,650 and $73,288 was outstanding
as of September 30, 2009 and September 30, 2008,
respectively.
|
293,557
|
|
500,000
|
||||
Mitchell
Shaheen Note: Subordinated note payable, 25% per annum,
unsecured, principal and interest was due July 18, 2008. Additionally, the
Company issued a warrant to purchase 100,000 shares of the Company’s
common stock at a price equal to $.75 per share (the “Warrant”). The
Warrant is exercisable immediately and carries a ten (10) year term.
The Holder may convert all or part of the then-outstanding Note balance
into shares at $.50 per share. If applicable, the Company has agreed to
include the Conversion Shares in its first registration statement filed
with the Securities and Exchange Commission. Demand for repayment was made
on August 27, 2008. Accrued interest of $48,787 and $10,685 was
outstanding as of September 30, 2009 and September 30, 2008,
respectively.
|
150,000
|
|
150,000
|
||||
Mitchell
Shaheen Note: Subordinated note payable, 25% per annum,
unsecured, principal and interest was due August 10, 2008. Additionally,
the Company issued a warrant to purchase 100,000 shares of the Company’s
common stock at a price equal to $.50 per share (the “Warrant”). The
Warrant is exercisable immediately and carries a ten (10) year term.
The Holder may convert all or part of the then-outstanding Note balance
into shares at $.50 per share. If applicable, the Company has agreed to
include the Conversion Shares in its first registration statement filed
with the Securities and Exchange Commission. Demand for repayment was made
on August 27, 2008. Accrued interest of $34,513 and $5,548 was outstanding
as of
September
30, 2009 and September 30, 2008, respectively.
|
100,000
|
|
100,000
|
||||
$582,301
|
$894,104
|
F-11
All of
the notes shown in the table above are in default and are currently due and
payable.
The notes
held by Investment Hunter, LLC, George Resta and Mitchell Shaheen had
convertibility features when they were issued. As of September 30,
2009, the convertibility features had expired.
All of
the notes payable in the table above initially had conversion rights and
warrants. We recognized an embedded beneficial conversion feature
present in these Notes. We allocated the proceeds based on the fair
value of $340,043 to the warrants. The warrants are exercisable
through March 31, 2018 and the fair value was amortized to interest expense
over the term of the Notes.
Note
5 — Commitments and Contingencies
Consulting
Agreements.
On
June 1, 2007, we entered into a consulting agreement with The Rationale
Group, LLC (“Rationale Group”). The managing member of Rationale
Group is Dr. William Coyro, Jr., who serves as the chairman of Ecology’s
business advisory board. The agreement expired June 1,
2009. Ecology pays Rationale Group $11,000 per month under the
Agreement. Additionally, Ecology granted Rationale Group 200,000
options to purchase shares of our common stock for $2.00 per
share. Of these options, 50,000 options vested on December 1,
2007, 50,000 options vested on June 1, 2008, 50,000 options vested on
December 1, 2008, and the remaining 50,000 options vested on June 1,
2009. Additionally, we agreed to reimburse Rationale Group for all
reasonable expenses incurred by Rationale Group in the conduct of our business.
On February 11, 2009, we amended the agreement upon the following
terms:
·
|
Six
monthly payments to Rationale Group of $5,000, with payments ended on July
1, 2009.
|
·
|
Re-pricing
of the 50,000 options that vested on December 1, 2007 by our Board to an
exercise price of $.50 per share
|
·
|
Rationale
Group forgave $121,000 owed by us to
them.
|
·
|
Rationale
Group transferred options to purchase 50,000 shares of common stock that
vest on June 1, 2009 to Equity 11, our largest
shareholder. J.B. Smith, a director of our Board, is the
managing partner and majority owner of Equity
11.
|
On
July 26, 2007, we entered into a consulting agreement with DMG Advisors,
LLC, owned by two former officers and directors of OCIS
Corporation. The terms of the agreement call for the transfer of the
$100,000 standstill deposit paid to OCIS as a part of a total payment of
$200,000. The balance will be paid in equal installments on the first
day of each succeeding calendar month until paid in full. The
agreement calls for the principals to provide services for 18 months in the
area of investor relations programs and initiatives; facilitate conferences
between Ecology and members of the business and financial community; review and
analyze the public securities market for our securities; and introduce Ecology
to broker-dealers and institutions, as appropriate. The agreement
expired on February 28, 2009.
F-12
On July
21, 2009, we entered into a Settlement and Release Agreement with DMG Advisors,
LLC, Kirk Blosch and Jeff Holmes which terminated the parties’ July 26, 2007
Consulting Agreement. We agreed to issue 500,000 shares of our common stock as
payment for services owed under the Former Consulting Agreement.
On July
21, 2009, we entered into a new Consulting Agreement with DMG
Advisors. DMG Advisors will provide investor, business and financial
services to us under the New Consulting Agreement and will be paid $5,000 per
month for services by the issuance of 25,000 shares of the our common stock per
month. The Agreement has a term of six months and terminates on
January 15, 2010.
On
April 2, 2008, we entered into a letter agreement with Dr. Robert Matheson
to become chairman of our Scientific Advisory Board. The letter
agreement provides that we will grant Dr. Matheson options to purchase 100,000
shares of our common stock. Each option is exercisable at a price of
$2.05 per share. The options vest as follows: 25,000 immediately upon
grant; 25,000 on October 3, 2008; 25,000 on April 3, 2009, and the
remaining 25,000 on October 3, 2009. The options will all expire
on April 3, 2018.
On
September 17, 2008, we entered into an agreement with Sales Attack LLC, an
entity owned by J.B. Smith, a director of the Company and managing partner of
Equity 11 who is our largest shareholder. This agreement is for
business and marketing consulting services. This agreement expires on
September 17, 2010 and calls for monthly payments of $20,000, commissions on
licensing revenues equal to 15% of said revenues, commissions on product sales
equal to 3% of said sales, and a grant of options to purchase 531,000 shares of
our common stock for $1.05 per share. 177,000 of the options became exercisable
on March 17, 2009, 177,000 of the options become exercisable on September 17,
2009, and 177,000 of the options become exercisable on March 17,
2010. The options expire on December 31, 2020. We paid
$60,000 to Sales Attack LLC during the year ended September 30, 2009. On May 15,
2009, we issued 100 Series B Convertible Preferred Securities in full settlement
of all monthly payment amounts then outstanding and terminated any future
monthly obligations of this Agreement.
On
September 17, 2008, we entered into an agreement with RJS Consulting LLC
(“RJS”), an entity owned by our chairman of the board of directors, Richard
Stromback, under which RJS will provide advice and consultation to us regarding
strategic planning, business and financial matters, and revenue
generation. The agreement expires on September 17, 2011 and calls for
monthly payments of $16,000, commissions on licensing revenues equal to 15% of
said revenues, commissions on product sales equal to 3% of said sales, $1,000
per month to pay for office rent reimbursement, expenses associated with RJS’s
participation in certain conferences, information technology expenses incurred
by the consultant in the performance of duties relating to the Company, and
certain legal fees incurred by Richard Stromback during his tenure as our Chief
Executive Officer.
On
September 17, 2008, we entered into an agreement with DAS Ventures LLC (“DAS”)
under which DAS will act as a consultant to us. DAS Ventures, LLC is
wholly owned by Doug Stromback, a principal shareholder and former director and
brother of our Chairman, Rich Stromback, Under this agreement, DAS
will provide business development services for which he will receive commissions
on licensing revenues equal to 15% of revenues and commissions on product sales
equal to 3% of said sales and reimbursement for information technology expenses
incurred by the consultant in the performance of duties relating to the Company.
This agreement expires on September 17, 2011.
On
November 11, 2008, we settled the lawsuit we filed against Trimax, LLC
(“Trimax”) on September 11, 2008 for breach of contract. Under the
terms of the settlement, we will pay Trimax $7,500 per month for twelve months
under a new consulting agreement and will pay $15,000 in 12 equal monthly
payments of $1,250 to Trimax’s attorney. Additionally, we will
pay Trimax a commission of 15% for licensing revenues and 3% for product sales
that Trimax generates for the Company. On June 12, 2009, we
terminated the agreement and replaced it with a new one in which the sole
compensation paid to Trimax will be a commission of 15% for licensing revenues
and 3% for product sales to Daewoo. This new agreement expires June 12, 2010 and
can be terminated on 90 days written notice by either party.
F-13
On
January 1, 2009, we entered into a new agreement with McCloud Communication to
provide investor relations services to us. The new agreement calls
for monthly payments of $5,500 for 12 months. In addition, the
consultant forgave $51,603 in past due amounts owed by the Company in exchange
for a reset of the exercise price on options to purchase 25,000 shares of our
common stock that we issued to the consultant on April 8, 2008. The exercise
price at the time of issuance was $4.75 per share. This price was
re-set by our Board to $.88 per share on February 6, 2009.
On
January 5, 2009, we entered into an agreement with James Juliano to provide debt
consulting services to us. Mr. Juliano is a principal in Equity 11. The
agreement calls for twelve monthly payments of $7,500 and expires on December
31, 2009. No monthly payments were made to Mr. Juliano for the year
ended on September 30, 2009. On May 15, 2009, we issued 37.5
Convertible Preferred Securities in full settlement of all amounts then
outstanding and terminated the agreement.
Employment
Agreements.
On
January 1, 2007, we entered into an employment agreement with Sally J.W.
Ramsey, Vice President New Product Development, that expires on January 1,
2012. Upon expiration, the agreement calls for automatic one-year
renewals until terminated by either party with thirty days written
notice. Pursuant to the agreement, the officer will be paid an annual
base salary of $180,000 in 2007; an annual base salary of $200,000 for the years
2008 through 2011; and an annual base salary of $220,000 for 2012. On
December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base
salary to $60,000. In addition, 450,000 options were granted to the
officer to acquire our common stock at $2.00 per share. 150,000 options will
vest on January 1, 2010, 150,000 options will vest on January 1, 2011
and the remaining 150,000 options will vest January 1, 2012. The
options expire on January 1, 2022.
On
September 21, 2009, we entered into a second amendment to the employment
agreement with Ms. Ramsey that amends her employment agreement with us dated
January 1, 2007 to provide for an annual salary of $75,000 effective November 1,
2009. From December 15, 2008 until September 21, 2009, Ms. Ramsey's annual
salary was $60,000.
On
February 1, 2007, we entered into an employment agreement with Kevin Stolz,
Chief Financial Officer, Controller and Chief Accounting Officer, that expired
on February 1, 2008. Pursuant to the agreement, the officer was paid an
annual base salary of $120,000 and was granted 25,000 options to acquire our
common stock at $2.00 per share. These options were re-priced to
$1.05 per share on September 15, 2008. All of the options vested on
February 1, 2008. The options expire on February 1, 2017. On
February 1, 2008, we entered into a new agreement with this
officer. This new agreement expires on February 1, 2010 and
calls for an annual salary of $140,000. Further, Mr. Stolz was
granted 50,000 options to purchase shares of our common stock at $3.00 per
share. These options were re-priced to $1.05 per share on September
15, 2008. 25,000 options vest on February 1, 2009 and the
remaining 25,000 options vest on February 1, 2010. This
agreement was modified effective October 1, 2008. Under the modified
agreement, Mr. Stolz receives an annual base salary of $70,000, subject to
increase to $140,000 upon the achievement by the Company of revenues of at least
$100,000. Additionally, we granted Mr. Stolz options to purchase
10,000 shares of our common stock at $1.05 per share. The options
become exercisable on September 17, 2009 and expire on September 17, 2018. Mr.
Stolz assumed the additional title of Chief Financial Officer on March 26,
2009. On July 24, 2009, this agreement was terminated by mutual
agreement of the parties. Mr. Stolz continues in his positions of Chief
Financial Officer, Controller and Chief Accounting Officer.
On
May 21, 2007, we entered into an employment agreement with David W. Morgan,
Chief Financial Officer, that expired on May 21, 2009. Pursuant
to the agreement, Mr. Morgan was paid an annual base salary of $160,000 and was
granted 300,000 options to acquire our common stock at $2.00 per
share. These options were re-priced to $1.05 per share on September
15, 2008. 75,000 of the options vested on May 21, 2008, and 225,000 of the
options vested on May 21, 2009. The options expire on
May 21, 2017. On October 1, 2007, the Company modified the employment
agreement to increase the salary from $160,000 to $210,000. This
agreement was terminated on December 3, 2008 and Mr. Morgan continued to serve
as our Chief Financial Officer and was being paid $60,000 per annum. Mr. Morgan
resigned on March 26, 2009 and his employment agreement was terminated. We will
pay medical insurance premiums of $1,128 per month through September of 2009 for
him.
F-14
On
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett , our CEO. Mr. Crockett has served as our CEO since September 15, 2008.
The agreement expires on September 21, 2012. Mr. Crockett will receive an
annual base salary of $200,000. The Compensation Committee of the Board of
Directors may review Mr. Crockett’s salary to determine what, if any, increases
shall be made thereto. In addition, the vesting for Mr. Crockett’s previously
awarded stock options was adjusted so that 110,000 stock options will vest 12
months, 18 months and 24 months respectively from Mr. Crockett’s initial date of
employment (September 15, 2008). Mr. Crockett was also granted
stock options to purchase 670,000 shares of our common stock, one-quarter of
which shall vest at 30, 36, 42 and 48 months from Mr. Crockett’s initial date of
employment with us (September 15, 2008) with an exercise price of $.51 per
share. The agreement may be terminated prior to the end of the term for cause.
If Mr. Crockett’s employment is terminated without cause or for “good
reason,” as defined in the agreement, he is entitled to 50% of salary that would
have been paid over the balance of the term of the agreement. Further, a
termination within one year after a change in control shall be deemed to be
a termination without cause.
On
September 21, 2009, we entered into an employment agreement with Daniel V.
Iannotti, our Vice President, General Counsel & Secretary. Mr.
Iannotti has served as our Vice President, General Counsel since
August 11, 2008. The agreement expires on September 21, 2012. Effective November
1, 2009, Mr. Iannotti will receive an annual base salary of $150,000. The
Compensation Committee of the Board of Directors may review Mr. Iannotti’s
salary to determine what, if any, increases shall be made thereto. In addition,
the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so
that 110,000 stock options will vest 12 months, 18 months and 24 months
respectively from Mr. Iannotti’s initial date of employment (August 11,
2008). Mr. Iannotti was also granted stock options to purchase
70,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42
and 48 months from Mr. Iannotti’s’s initial date of employment with us (August
11, 2008) with an exercise price of $.51 per share. The agreement may be
terminated prior to the end of the term for cause. If Mr. Iannotti’s
employment is terminated without cause or for “good reason,” as defined in the
agreement, he is entitled to 50% of salary that would have been paid over the
balance of the term of the agreement. Further, a termination within one
year after a change in control shall be deemed to be a termination without
cause.
On
September 21, 2009, we entered into an employment agreement with F. Thomas
Krotine, our COO. The agreement expires on September 21, 2010. Effective
November 1, 2009, Mr. Krotine will receive an annual base salary of
$65,000. The Compensation Committee of the Board of Directors may review Mr.
Krotine’s salary to determine what, if any, increases shall be made thereto.
Mr. Krotine was also granted stock options to purchase 169,000 shares of
our common stock, one-quarter of which shall vest at 6, 12, 18 and 24 months
from September 21, 2009 with an exercise price of $.51 per share. The agreement
may be terminated prior to the end of the term for cause. If Mr. Krotine’s
employment is terminated without cause or for “good reason,” as defined in the
agreement, he is entitled to 50% of salary that would have been paid over the
balance of the term of the agreement. Further, a termination within one year of
a change in control shall be deemed to be a termination without
cause.
F-15
Contingencies.
Lease
Commitments.
a.
|
The
Company leases office and lab facilities in Akron, OH on a month-to-month
basis for $1,800. Rent expense for the year ended September 30,
2009 and 2008 was $23,600 and $21,600, respectively.
|
||
b.
|
On
September 1, 2008, we executed a lease for our office space in Auburn
Hills, Michigan. The lease calls for average monthly rent of
$2,997 and expires on September 30, 2010. The landlord is a
company owned by a shareholder and director of Ecology. Rent expense for
the year ended September 30, 2009 and September 30, 2008 were $34,699 and
$10,723 respectively.
|
||
c.
|
On
June 17, 2007, we leased computer equipment with 36 monthly
payments of $42. We recognized expense of $504 and $504 for the years
ended September 30, 2009 and 2008, respectively, related to
this lease.
|
||
d.
|
On
July 17, 2007, we leased computer equipment with 36 monthly
payments of $44. We recognized expense of $528 and $528 for the
years ended September 30, 2009 and 2008, respectively, related to this
lease.
|
||
e.
|
On
September 22, 2008, we leased a multi-purpose copier with 36 monthly
payments of $526. The first payment was due November 3,
2008. We recognized expense of 5,786 and $0 for the years ended
September 30, 2009 and 2008,
respectively
|
Minimum
future rental payments under the above operating leases as of September 30, 2009
are as follows:
Year Ending September 30,
|
Amount
|
2010
|
$44,530
|
2011
|
$5,260
|
TOTAL:
|
$49,790
|
F-16
Note
6 — Equity
Reverse
Merger. A reverse merger with OCIS Corporation was consummated
on July 26, 2007. The shareholders of Ecology-CA acquired 95% of the
voting stock of OCIS. OCIS had no significant operating history. The
purpose of the acquisition was to provide Ecology with access to the public
equity markets in order to more rapidly expand its business
operations. The consideration to the shareholders of OCIS was
approximately 5% of the stock, at closing, of the successor
company. The final purchase price was agreed to as it reflects the
value to Ecology of a more rapid access to the public equity markets than a more
traditional initial public offering.
Warrants. On
December 16, 2006, we issued warrants to Trimax, LLC to purchase 500,000
shares of our stock at $2.00 per share. On November 11, 2008, the
exercise price of the warrants was reset to $.90 per share. The
warrants vested on December 17, 2007. The weighted average remaining life
of the warrants is 7.3 years.
On
February 6, 2008, we issued warrants to Hayden Capital to
purchase 262,500 shares of our common stock at the lower of $2.00 per share or
at the average price per share at which the Company sells its debt or and/or
equity in its next private or public offering. The warrants vested
upon issuance. The weighted average remaining life of the warrants is
8.3 years.
On
March 1, 2008, we issued warrants to George Resta to purchase 12,500 shares
of our common stock at the lower of $2.00 per share or at the average price per
share at which the Company sells its debt or and/or equity in its next private
or public offering. The warrants vested upon issuance. The
weighted average remaining life of the warrants is 8.3 years.
On
March 1, 2008, we issued warrants to Investment Hunter, LLC to purchase
125,000 shares of our common stock at the lower of $2.00 per share or at the
average price per share at which the Company sells its debt or and/or equity in
its next private or public offering. The warrants vested upon
issuance. The weighted average remaining life of the warrants is
8.3 years.
On June
9, 2008, we issued warrants to Hayden Capital to purchase 210,000 shares of our
common stock at the lower of $2.00 per share or at the average price per share
at which the Company sells its debt or and/or equity in its next private or
public offering. The warrants vested upon issuance. The
weighted average remaining life of the warrants is 8.6 years.
On June
21, 2008, we issued warrants to Mitchell Shaheen to purchase 100,000 shares of
our common stock at $.75 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is
8.6 years.
On July
14, 2008, we issued warrants to Mitchell Shaheen to purchase 100,000 shares of
our common stock at $.50 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 8.6
years.
On July
14, 2008, we issued warrants to George Resta to purchase 15,000 shares of our
common stock at $1.75 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 8.6
years.
On July
14, 2008, we issued warrants to Investment Hunter, LLC to purchase 15,000 shares
of our common stock at $1.75 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 8.6
years.
We issued
the following immediately vested warrants to Equity 11 in conjunction with
Equity 11’s purchases of our 5% convertible preferred stock:
F-17
Strike
|
Date
|
Expiration
|
||||
Number
|
Price
|
Issued
|
Date
|
|||
100,000
|
$0.75
|
July
28, 2008
|
July
28, 2018
|
|||
5,000
|
$0.75
|
August
20, 2008
|
August
20, 2018
|
|||
25,000
|
$0.75
|
August
27, 2008
|
August
27, 2018
|
|||
500,000
|
$0.75
|
August
29, 2008
|
August
29, 2018
|
|||
375,000
|
$0.75
|
September
26, 2008
|
September
26, 2018
|
|||
47,000
|
$
0.75
|
January
23, 2009
|
January
23, 2014
|
|||
15,000
|
$
0.75
|
February
10, 2009
|
February
10, 2014
|
|||
12,500
|
$
0.75
|
February
18, 2009
|
February
18, 2014
|
|||
20,000
|
$
0.75
|
February
26, 2009
|
February
26, 2014
|
|||
11,500
|
$
0.75
|
March
10, 2009
|
March
10, 2014
|
|||
40,000
|
$
0.75
|
March
26, 2009
|
March
26, 2014
|
|||
10,750
|
$0.75
|
April
14, 2009
|
April
14, 2014
|
|||
16,750
|
$0.75
|
April
29, 2009
|
April
29, 2014
|
On
November 11, 2008, we issued warrants to purchase 2,000,000 shares of our common
stock at $.50 per share to Trimax. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 9.0
years.
Shares. On
February 6, 2008, we entered into an allonge to the promissory note made to
Christopher Marquez on February 28, 2006. The amount owed, including
principal and accrued interest, totaled $142,415 and the note matured on
December 31, 2007 (See Note 4). The maturity date of the note
was extended to May 31, 2008, with interest continuing at 15% per
annum. In consideration of this extension, we issued 60,000 shares of
our common stock to the note holder and granted the holder certain priority
payment rights. This note has been paid in full.
On August
28, 2008, we entered into an agreement with Equity 11 to issue up to $5,000,000
in convertible preferred securities. The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at $.50 per
share. The preferred securities carry “as converted” voting
rights. As of June 30, 2009, we had issued 2,436 of these convertible
preferred shares. As we sell additional convertible preferred
securities under this agreement, we will issue attached warrants (500 warrants
for each $1,000 convertible preferred share sold). The warrants will
be immediately exercisable, expire in five years, and entitle the investor to
purchase one share of our common stock at $.75 per share for each warrant
issued. The table above identifies warrants issued in conjunction
with Equity 11’s additional purchases of our 5% convertible preferred stock
through September 30, 2009.
On May
15, 2009, we entered into an agreement with Equity 11 to issue convertible
preferred securities at $1,000 per share. The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at a price equal
to 20% of the average closing price of our common shares for the five trading
days immediately preceding the date of issuance. The preferred securities carry
“as converted” voting rights. As of September 30, 2009, we have
issued 566 of these convertible preferred securities. These shares are
convertible into 5,802,377 of our common shares at the sole discretion of Equity
11.
In the
event of a voluntary or involuntary dissolution, liquidation or winding up,
Equity 11 will be entitled to be paid a liquidation preference equal to the
stated value of the convertible preferred shares, plus accrued and unpaid
dividends and any other payments that may be due on such shares, before any
distribution of assets may be made to holders of capital stock ranking junior to
the preferred shares.
On
September 30, 2009, Ecology Coatings, Inc. we and Stromback Acquisition
Corporation, entered into a Securities Purchase for the issuance and sale
of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase
price of $1,000 per share. Stromback Acquisition Corporation is owned
by Richard Stromback a former member of our Board of
Directors. Until April 1, 2010, Purchaser has the right to purchase
up to 3,000 Convertible Preferred Shares. The Convertible Preferred
Shares have a liquidation preference of $1,000 per share. Purchaser
may convert the Convertible Preferred Shares into common stock of the
Company at a conversion price that is seventy seven percent (77%) of the
average closing price of Company’s common stock on the Over-The-Counter Bulletin
Board for the five trading days prior to each investment. The
Convertible Preferred Shares will pay cumulative cash dividends at a rate of 5%
per annum, subject to declaration by our Board of Directors, on December 1 and
June 1 of each year. We have agreed to provide piggyback registration
rights for common stock converted by Purchaser under a Registration Rights
Agreement. See also Note 10—Subsequent Events
F-18
Fifty
percent (50%) of each investment, up to a maximum of $500,000, will be placed in
a fund and disbursed as directed by Purchaser to satisfy our outstanding debts,
accounts payable and/or investor relations programs (“Discretionary
Fund”).
Note
7 — Stock Options
Stock Option
Plan. On May 9, 2007, we adopted a stock option plan and
reserved 4,500,000 shares for the issuance of stock options or for awards of
restricted stock. On December 2, 2008, our Board of Directors authorized the
addition of 1,000,000 shares of our common stock to the 2007
Plan. All prior grants of options were included under this
plan. The plan provides for incentive stock options, nonqualified
stock options, rights to restricted stock and stock appreciation
rights. Eligible recipients are employees, directors, and
consultants. Only employees are eligible for incentive stock
options.
The
vesting terms are set by the Board of Directors. All options expire
10 years after issuance.
We
granted non-statutory options as follows during the year ended September 30,
2009:
Weighted
Average Exercise Price Per Share
|
Number
of Options
|
Weighted
Average (Remaining) Contractual Term
|
Aggregate
Fair Value
|
|
Outstanding
as of September 30, 2008
|
$1.83
|
4,642,119
|
9.2
|
$5,011,500
|
Granted
|
$.61
|
1,439,000
|
9.8
|
$634,491
|
Exercised
|
$.50
|
50,000
|
7.8
|
$76,447
|
Forfeited
|
$2.13
|
900,000
|
7.8
|
$1,008,404
|
Outstanding
as of September 30, 2009
|
$1.13
|
5,131,119
|
8.5
|
$4,569,065
|
Exercisable
|
$1.06
|
2,925,119
|
6.7
|
$3,249,831
|
2,925,119
of the options were exercisable as of September 30, 2009. The options
are subject to various vesting periods between June 26, 2007 and
January 1, 2012. The options expire on various dates
between June 1, 2016 and January 1, 2022. Additionally, the options
had no intrinsic value as of September 30, 2009. Intrinsic value
arises when the exercise price is lower than the trading price on the date of
grant.
Employee
and director stock-based compensation expense is measured utilizing the
fair-value method.
We
account for stock options granted to non-employees under the fair-value method
with stock-based compensation expense being charged to earnings on the earlier
of the date services are performed or a performance commitment
exists.
In
calculating the compensation related to employee/consultants and directors stock
option grants, the fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted average
assumptions:
Dividend
|
None
|
Expected
volatility
|
86.04%-101.73%
|
Risk
free interest rate
|
.10%-5.11%
|
Expected
life
|
5
years
|
The
expected volatility was derived utilizing the price history of another publicly
traded nanotechnology company. This company was selected due to the
fact that it is widely traded and is in the same equity sector as our
Company.
F-19
The risk
free interest rate figures shown above contain the range of such figures used in
the Black-Scholes calculation. The specific rate used was dependent
upon the date of the option grant.
Based
upon the above assumptions and the weighted average $1.13 exercise price, the
options outstanding at September 30, 2009 had a total unrecognized compensation
cost of $648,330 which will be recognized over the remaining weighted average
vesting period of .5 years. Options cost of $3,182,773 was recorded as an
expense for the year ended September 30, 2009 of which $799,209 was recorded as
compensation expense and $2,383,564 was recorded as consulting
expense. Of this amount, $1,368,450 was consulting expense due to the
issuance of warrants to Trimax LLC in November 2008 to acquire 2,000,000 shares
of our common stock.
Note
8 -- Income Taxes
The
Company has incurred losses since operations commenced in 1990. The
Company has a net operating loss carry forward for income tax purposes of
approximately $10,440,946. The total loss carry forward expiring on September
30, 2029 is $2,093,526, expiring on September 30, 2028 is $3,959,334, expiring
on September 30, 2027 is $3,513,085, expiring on September 30, 2026 is $426,697,
expiring on September 30, 2025 is $203,978, expiring on September 30, 2024 is
$198,988, expiring on September 30, 2023 is $25,597 and expiring on September
30, 2022 is $19,741. The Company changed its year-end to September
30th from
February 28th
effective in fiscal 2006.
Deferred
income taxes arise from timing differences resulting from income and expense
items reported for financial accounting and tax purposes in different
periods.
The
principal sources of timing differences are different accrual versus cash
accounting methods used for financial accounting and tax purposes; the timing of
the utilization of the net operating losses, and different book versus tax
depreciation methods.
As of
September 30, 2009 and 2008, the deferred tax asset based on a 34% tax bracket
consists of the following:
2009
|
2008
|
||||
Assets:
|
|||||
Federal
loss carry forwards
|
$ 3,549,921
|
$ 2,537,985
|
|||
Cash
basis accounting differences
|
397,142
|
451,603
|
|||
Depreciation
timing differences
|
|
|
|
||
Liability:
|
|
||||
Depreciation
timing differences
|
1,227
|
(804)
|
|||
Deferred
tax asset
|
3,948,290
|
2,988,784
|
|||
Valuation allowance
|
(3,948,290)
|
(2,988,784)
|
|||
Net
deferred tax asset
|
$ -
|
$ -
|
The tax
benefit from net operating losses and differences in timing differ from the
federal statutory rate primarily due to the $959,506 change in the deferred tax
asset valuation allowance from September 30, 2008. As of September 30,
2009 and 2008, the Company had no unrecognized tax benefits due to uncertain tax
positions.
F-20
Note
9 — Going Concern
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. For the years ended September 30,
2009 and 2008, we incurred net losses of ($5,182,192) and ($6,770,322),
respectively. As of September 30, 2009 and September 30, 2008,
we had stockholders’ deficits of ($2,010,657) and ($1,239,810),
respectively.
Our
continuation as a going concern is dependent upon our ability to generate
sufficient cash flow to meet our obligations on a timely basis, to obtain
additional financing or refinancing as may be required, to develop commercially
viable products and processes, and ultimately to establish profitable
operations. We have financed operations primarily through the
issuance of equity securities and debt and through some limited operating
revenues. Until we are able to generate positive operating cash
flows, additional funds will be required to support our
operations. We will need to acquire additional immediate funding in
fiscal year 2010 to continue our operations. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going
concern.
Note
10 — Subsequent Events
The
Company evaluated subsequent events for potential recognition and/or disclosure
through December 22, 2009, the date the consolidated financial statements were
issued.
On
October 1, 2009, we issued 240 Convertible Preferred Shares at an aggregate
purchase price of $240,000 under our securities purchase agreement with
Stromback Acquisition Corporation. These securities can be converted
into 571,429 shares of our common stock. A warrant was issued to Purchaser
granting rights to purchase 14,400 shares of our common stock at a purchase
price of $.42 per share. Per the terms of the agreement and at Mr.
Stromback’s direction, we paid $120,000 to him on that date in settlement of
past payables owed to him directly or to RJS Ventures, LLC, a company controlled
by him.
On
November 9, 2009, we issued 50 Convertible Preferred Shares, Series B, at an
aggregate price of $50,000 to Equity 11. These shares can be converted into
714,286 shares of our common stock.
On
November 30, 2009, we issued a note for $3,600 to JB Smith, LC. This company is
owned by J.B. Smith, a member of our board of directors. The interest bears
interest at 5% per annum and is payable with 15 days of demand by the
holder.
On
December 1, 2009, we issued 61 Convertible Preferred Shares, Series A, to Equity
11 in payment of the dividend due on that date. These shares are convertible
into 122,000 shares of our common stock.
On
December 1, 2009, we issued 14 Convertible Preferred Shares, Series B, to Equity
11 in payment of the dividend due on that date. These shares are convertible
into 175,000 shares of our common stock.
On
December 4, 2009, we issued 65 Convertible Preferred Shares, Series B, at an
aggregate price of $65,000 to Equity 11. These shares can be converted into
812,500 shares of our common stock.
On
December 16, we issued 31 Convertible Preferred Shares, Series B, at an
aggregate price of $31,000 to Equity 11. These shares can be
converted into 606,000 shares of our common stock.
F-21
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and Shareholders of
Ecology
Coatings, Inc.
We hereby
consent to the inclusion in this Registration Statement on Form S-1 (Amendment
No. 3) of our report dated December 22, 2009, relating to the consolidated
financial statements of Ecology Coatings, Inc. and Subsidiary as of September
30, 2009 and 2008, and for the two years in the period ended September 30, 2009,
appearing in the Annual Report on Form 10-K of Ecology Coatings, Inc. and
Subsidiary for the year ended September 30, 2009.
We also
consent to the reference to us under the heading "Experts" in such Registration
Statement on Form S-1 (Amendment No. 3).
/s/ UHY
LLP
Southfield,
Michigan
January
11, 2010
F-22
ITEM
11A: MATERIAL CHANGES
Not
applicable.
ITEM
12: INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Not
applicable.
ITEM
12A: DISCLOSURE OF COMMISION POSITION ON INDEMNFICATION FOR
SECURITIES ACT LIABILITIES
Under our
Articles of Incorporation, our directors will not be personally liable to us or
to our shareholders for monetary damages for any breach of their fiduciary duty
as a director, except liability for the following:
·
|
Any
breach of their duty of loyalty to us or to our
shareholders.
|
·
|
Acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law.
|
·
|
Unlawful
payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 78.7502 of the Nevada Revised
Statutes.
|
·
|
Any
transaction from which the director derived an improper personal
benefit.
|
We
believe that these limitation of liability provisions are necessary to attract
and retain qualified persons as directors and officers.
The
limitation of liability provisions in our Articles of Incorporation may
discourage shareholder from bringing a lawsuit against our directors for breach
of their fiduciary duty. They may also reduce the likelihood of derivative
litigation against our directors and officers, even though an action, if
successful, might benefit us and other stockholders.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
64
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated
expenses, other than transfer taxes and any brokerage discounts or commissions
or similar expenses, payable by us in connection with the sale of the common
stock being registered under this registration statement are as
follows:
SEC
registration fee
|
$285
|
Legal
fees and expenses
|
$20,000
|
Accounting
fees and expenses
|
$10,000
|
Blue
Sky fees and expenses (including legal fees)
|
$10,000
|
Transfer
Agent fees and expenses
|
$5,000
|
Miscellaneous
|
$10,000
|
Total:
|
$55,285
|
ITEM
14: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our
Articles of Incorporation and Bylaws contain broad indemnification and liability
limiting provisions regarding our officers, directors and employees, including
the limitation of liability for certain violations of fiduciary
duties. In addition, we maintain Directors and Officers liability
insurance. Our shareholders will have only limited recourse against
directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of our company under
Nevada law or otherwise, we have been advised the opinion of the SEC is that
such indemnification is against public policy as expressed in the Securities Act
and may, therefore, be unenforceable.
ITEM
15: RECENT SALES OF UNREGISTERED SECURITIES
Set forth
below is a description of all of our sales of unregistered securities during the
last three years. All sales were made to “accredited investors” as
such term is defined in Regulation D promulgated under the Securities Act
of 1933, as amended (the “Act”). All such sales were exempt from
registration under Section 4(2) of the Act, as transactions not involving a
public offering. Unless indicated, we did not pay any commissions to third
parties in connection with the sales.
On August
28, 2008, we entered into a Securities Purchase Agreement with Equity 11 for the
issuance of 5% convertible preferred shares at a price of $1,000 per
share. Under the Securities Purchase Agreement, Equity 11 may
purchase up to $5,000,000 of 5% convertible preferred shares. In
addition, for each acquisition of convertible preferred shares, Equity 11 will
be issued warrants to purchase up to 2,500,000 shares of our common stock at
$.75 per share. As of September 30, 2009, under this Agreement,
Equity 11 had been issued 2,436 shares of 5% Convertible Preferred Shares and
had been issued warrants to purchase 1,178,500 shares.
On May
15, 2009, we entered into a Convertible Preferred Securities Agreement (the
“Preferred Securities Agreement”) with Equity 11 for the issuance and sale of
5.0% Cumulative Convertible Preferred Shares, Series B of the Company at a
purchase price of $1,000 per share. The Preferred Securities
Agreement did not replace or terminate the terms of the Securities Purchase
Agreement. That is, the terms of the Securities Purchase Agreement
will continue to apply to preferred stock and warrants issued under the
Securities Purchase Agreement. Similarly, the terms of the Preferred
Securities Agreement will apply to preferred stock issued under the Preferred
Securities Agreement.
65
Equity 11
may convert the Convertible Preferred Shares into common stock of the
Company at a conversion price that is twenty percent (20%) of the average
of the closing price of Company’s common stock on the Over-The-Counter Bulletin
Board for the five trading days prior to each investment. As of
September 30, 2009, we had issued 364 Convertible Preferred Shares to
Equity 11 under this Agreement.
On September 30, 2009, we and Stromback
Acquisition Corporation, an Illinois corporation (the “Purchaser”), entered into
a Securities Purchase Agreement (the “Preferred Securities Agreement”) for
the issuance and sale of our 5.0% Cumulative Convertible Preferred Shares,
Series B (the “Convertible Preferred Shares”) at a purchase price of $1,000 per
share. Stromback Acquisition Corporation is owned by Richard
Stromback a former member of our Board of Directors. Until
April 1, 2010, Purchaser has the right to purchase up to 3,000 Convertible
Preferred Shares. The Convertible Preferred Shares have a liquidation
preference of $1,000 per share. Purchaser may convert the Convertible
Preferred Shares into shares of our common stock at a conversion price that is
seventy seven percent (77%) of the average closing price of our common stock on
the Over-The-Counter Bulletin Board for the five trading days prior to each
investment. The Convertible Preferred Shares will pay cumulative cash
dividends at a rate of 5% per annum, subject to declaration by our Board of
Directors, on December 1 and June 1 of each year. We have agreed to
provide piggyback registration rights for common stock converted by Purchaser
under a Registration Rights Agreement. Fifty percent (50%) of each investment,
up to a maximum of $500,000, will be placed in a fund and disbursed as directed
by Purchaser to satisfy our outstanding debts, accounts payable and/or investor
relations programs (“Discretionary Fund”). On October 1, 2009,
Stromback Acquisition Corporation acquired 240 of our Convertible Preferred
Shares, Series B with a purchase price per share of $1,000. We
received $240,000 of gross proceeds and net proceeds of $120,000 after payments
were made from the Discretionary Fund for outstanding obligations owed to Mr.
Stromback.
We issued
the following promissory notes during 2008:
Note Holder
|
Issue Date(s)
|
Amount Owing on September 22,
2009
|
Investment
Hunter, LLC
|
March
1, 2008
|
$336,973
|
Mitchell
Shaheen I
|
September
21, 2008
|
$187,003
|
Mitchell
Shaheen II
|
July
14, 2008
|
$126,540
|
George
Resta
|
March
1, 2008
|
$45,132
|
During
the prior three years, we issued the following warrants:
Number of Warrants
|
Issue Date
|
Expiration Date
|
Acquisition Price per Share
|
Held By
|
500,000
|
December
18, 2006
|
December
18, 2016
|
$.90
|
Trimax,
LLC
|
2,000,000
|
November
11, 2008
|
November
11, 2018
|
$.50
|
Trimax
LLC
|
12,500
|
March
1, 2008
|
March
1, 2018
|
$1.75
|
George
Resta
|
262,500
|
February
5, 2008
|
February
5, 2018
|
$2.00
|
Hayden
Capital USA, LLC
|
125,000
|
March
1, 2008
|
March
1, 2018
|
$1.75
|
Investment
Hunter. LLC
|
210,000
|
June
9, 2008
|
June
9, 2018
|
$2.00
|
Hayden
Capital USA, LLC
|
100,000
|
June
21, 2008
|
June
21, 2018
|
$.75
|
Mitchell
Shaheen
|
100,000
|
July
14, 2008
|
July
14, 2018
|
$.50
|
Mitchell
Shaheen
|
15,000
|
July
14, 2008
|
July
14, 2018
|
$1.75
|
George
Resta
|
15,000
|
July
14, 2008
|
July
14, 2018
|
$1.75
|
Investment
Hunter, LLC
|
14,400
|
October
1, 2009
|
October
1, 2019
|
$.42
|
Stromback
Acquisition Corporation
|
Total: 3,354,400
|
66
The notes
had limited conversion rights until their dates of maturity. They no
longer have the ability to convert to our common stock.
On July
21, 2007, we completed a Private Placement and raised $4,232,970 from the sale
of our common stock to private investors.
The
following summarizes the above recent sales of unregistered
securities:
Title
|
Date
|
Underwriters Or Purchasers
|
Consideration
|
Exemption
|
Ability To Convert
|
Terms of Conversion
|
Use of Proceeds
|
Private
Placement Memorandum
|
July
21, 2007
|
(1)
|
$2
per share
|
4(2)
of ’33 Securities Act
|
-
|
Working
Capital
|
|
Investment
Hunter, LLC
|
March
1, 2008
|
-
|
$500,000
|
4(2)
of ’33 Securities Act
|
Prior
to June 30, 2008
|
Lower
of $1.75 or price of “New Offering”
|
Working
Capital
|
Mitchell
Shaheen I
|
September
21, 2008
|
-
|
$150,000
|
4(2)
of ’33 Securities Act
|
Prior
to July 18, 2008
|
Lower
of $.50 or price of “New Offering”
|
Working
Capital
|
Mitchell
Shaheen II
|
July
14, 2008
|
$100,000
|
4(2)
of ’33 Securities Act
|
Prior
to August 10, 2008
|
“New
Offering” price
|
Working
Capital
|
|
George
Resta
|
March
1, 2008
|
$50,000
|
4(2)
of ’33 Securities Act
|
Prior
to June 30, 2008
|
Lower
of $1.75 or price of “New Offering
|
Working
Capital
|
|
(1)
|
The
list of PPM purchasers include: Daniel Ahlsrtrom, Edward F
Andrews, Alan Andrews, Donald Bailey Trust, Eugene Baratta, Marty
Bartnick, Michael Battaglia, Deanna Berman, John R Bourbeau, John
Bourbeau, Jr., Kastytis Buitkus, Bruce C Bullard, James C Carson, Thomas
Commes, William F Coyro, Jr., Jon Crouse, Shawn Van Drehle, Paul Dudgeon,
Gary Dudgeon, Dudgeon Ferguson Financial Group, Albert Hodgson, James
Hoen, Guy T Humeniuk, Rae Ann Hoffman Jones, Andrew & Danielle Kapoor,
Jeffrey Knudson, F. Thomas Krotine, John Lindeman, Henry & Michelle
Lindeman III, Michele & Maria Longordo, Chris Marquez, Simone
Mastantuono, Neil Master, Steven & Antonia Mellos, John Morgan, James
Padilla, Timothy Perkins, Sasha Prakash, Paul & Susan Prentis, Trimax,
LLC, Grace Rosman, Joseph Savel, Scott Schaffer, Robert Sims, Stephen
& Darlene Stephens, David T Sterrett, Jr., David Susko, Patrick
Sweeney, Kristin Wikol, and Michael
Wisniekski.
|
67
ITEM
16: EXHIBITS AND FINANCIAL INFORMATION SCHEDULES
Exhibit
Number
|
Description
|
2.1
|
Agreement
and Plan of Merger entered into effective as of April 30, 2007, by
and among OCIS Corp., a Nevada corporation, OCIS-EC, INC., a Nevada
corporation and a wholly-owned subsidiary of OCIS, Jeff W. Holmes, R. Kirk
Blosch and Brent W. Schlesinger and ECOLOGY COATINGS, INC., a California
corporation, and Richard D. Stromback, Deanna Stromback and Douglas
Stromback. (2)
|
3.2
|
Amended
and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada
corporation.(2)
|
3.3
|
By-laws.
(1)
|
3.4
|
Certificate
of Designation of 5% Convertible Preferred Shares dated August 29, 2008.
(9)
|
3.5
|
Certificate
of Designation of 5% Convertible Preferred Shares dated September 26,
2008. (14)
|
4.1
|
Form
of Common Stock Certificate of the Company. (2)
|
5.1
|
Opinion
of Daniel Iannotti, VP, General Counsel & Secretary.
(26)
|
10.1
|
Promissory
Note between Ecology Coatings, Inc., a California corporation, and Richard
D. Stromback, dated November 13, 2003. (2)
|
10.2
|
Promissory
Note between Ecology Coatings, Inc., a California corporation, and Deanna
Stromback, dated December 15, 2003. (2)
|
10.3
|
Promissory
Note between Ecology Coatings, Inc., a California corporation, and Douglas
Stromback, dated August 10, 2004. (2)
|
10.4
|
Registration
Rights Agreement by and between Ecology Coatings, Inc., a Nevada
corporation, and the shareholder of OCIS, Corp., a Nevada corporation,
dated as of April 30, 2007. (2)
|
10.5
|
Consulting
Agreement among Ecology Coatings, Inc., a Nevada corporation, and DMG
Advisors, LLC, a Nevada limited liability company dated July 27,
2007. (2)
|
10.6
|
Employment
Agreement between Ecology Coatings, Inc., a California corporation and
Kevin Stolz dated February 1, 2007. (2)
|
10.7
|
Employment
Agreement between Ecology Coatings, Inc., a California corporation and
Sally J.W. Ramsey dated January 1, 2007. (2)
|
10.8
|
License
Agreement with E.I. Du Pont De Nemours and Ecology Coatings, Inc., a
California corporation, dated November 8, 2004.
(2)
|
10.9
|
License
Agreement between Ecology Coatings, Inc., a California corporation and Red
Spot Paint & Varnish Co., Inc., dated May 6, 2005.
(2)
|
10.10
|
Lease
for office space located at 35980 Woodward Avenue, Suite 200,
Bloomfield Hills, Michigan 48304. (2)
|
10.11
|
Lease
for laboratory space located at 1238 Brittain Road, Akron,
Ohio 44310. (2)
|
10.12
|
2007
Stock Option and Restricted Stock Plan. (2)
|
10.13
|
Form
of Stock Option Agreement. (2)
|
10.14
|
Form
of Subscription Agreement between Ecology Coatings, Inc., a California
corporation and the Investor to identified
therein. (2)
|
10.15
|
Consulting
Agreement by and between Ecology Coatings, Inc., a California corporation,
and MDL Consulting Group, LLC, a Michigan limited liability company dated
April 10, 2006. (2)
|
10.16
|
Consulting
Agreement by and between Ecology Coatings, Inc., a California corporation,
and MDL Consulting Group, LLC, a Michigan limited liability company dated
July 1, 2006. (2)
|
10.17
|
Antenna
Group Client Services Agreement by and between Ecology Coatings, Inc., a
California corporation and Antenna Group, Inc. dated March 1, 2004, as
amended effective as of July 6, 2007. (2)
|
10.18
|
Consulting
Agreement by and between Ecology Coatings, Inc., a California corporation
and Kissinger McLarty Associates, date July 15, 2006, as
amended. (2)
|
10.19
|
Business
Advisory Board Agreement by and between Ecology Coatings, Inc., a
California corporation, and The Rationale Group, LLC, a Michigan limited
liability corporation, dated September 1,
2007. (2)
|
10.20
|
Allonge
to Promissory Note dated November 13, 2003 made in favor of Richard D.
Stromback dated February 6, 2008. (3)
|
10.21
|
Allonge
to Promissory Note dated December 15, 2003 made in favor of Deanna.
Stromback dated February 6, 2008. (3)
|
10.22
|
Allonge
to Promissory Note dated August 10, 2003 made in favor of Douglas
Stromback dated February 6, 2008. (3)
|
10.23
|
Third
Allonge to Promissory Note dated February 28, 2006 made in favor of Chris
Marquez dated February 6, 2008. (3)
|
10.24
|
Employment
Agreement with Kevin Stolz dated February 1, 2008. (4)
|
10.25
|
Promissory
Note made in favor of George Resta dated March 1, 2008.
(5)
|
10.26
|
Promissory
Note made in favor of Investment Hunter, LLC dated March 1, 2008.
(5)
|
10.27
|
Scientific
Advisory Board Agreement with Dr. Robert Matheson dated February 18, 2008.
(6)
|
10.28
|
Promissory
Note made in favor of Mitch Shaheen dated September 18, 2008.
(7)
|
10.29
|
Promissory
Note made in favor of Mitch Shaheen dated July 10, 2008.
(8)
|
10.30
|
Extension
of Promissory Note made in favor of Richard D. Stromback dated July 10,
2009. (8)
|
10.31
|
Extension
of Promissory Note made in favor of George Resta dated July 14, 2008.
(8)
|
10.32
|
Extension
of Promissory Note made in favor of Investment Hunter, LLC dated July 14,
2008. (8)
|
10.33
|
Securities
Purchase Agreement with Equity 11, Ltd. dated August 28, 2008.
(9)
|
10.34
|
First
Amendment to Employment Agreement of Richard D. Stromback dated August 27,
2008. (9)
|
10.35
|
First
Amendment to Employment Agreement of Kevin Stolz dated August 29, 2008.
(9)
|
10.36
|
Consulting
Services Agreement with RJS Consulting LLC dated September 17, 2008.
(10)
|
10.37
|
Consulting
Services Agreement with DAS Ventures LLC dated September 17, 2008.
(10)
|
10.38
|
Consulting
Services Agreement with Sales Attack LLC dated September 17, 2008.
(10)
|
10.39
|
First
Amendment to Securities Purchase Agreement with Equity 11, Ltd. dated
October 27, 2008. (11)
|
10.40
|
Consulting
Services Agreement with Trimax, LLC dated November 11, 2008.
(12)
|
10.41
|
Promissory
Note made in favor of Seven Industries date December 24, 2008.
(13)
|
10.42
|
Promissory
Note dated January 8, 2009 in favor of Seven Industries.
(15)
|
10.43
|
Amendment
of December 24, 2008 Promissory Note. (15)
|
10.44
|
Second
Amendment To Securities Purchase Agreement. (16)
|
10.45
|
Convertible
Preferred Securities Agreement dated May 15, 2009. (26)
|
10.46
|
Warrant
W-6. (17)
|
10.47
|
Warrant
W-7. (27)
|
10.48
|
Warrant
W-8. (18)
|
10.49
|
Warrant
W-9. (19)
|
10.50
|
Warrant
W-10. (20)
|
10.51
|
Warrant
W-11. (21)
|
10.52
|
Warrant
W-12. (22)
|
10.53
|
Promissory
Note in favor of JB Smith LC dated May 5, 2009. (23)
|
10.54
|
DMG
Advisors Consulting and Settlement Agreements. .(26)
|
10.55
|
Termination
of Kevin P. Stolz’s Employment Agreement. (24)
|
10.56
|
Promissory
Note in favor of Chris Marquez dated February 28, 2006.
(26)
|
10.57
|
First
Allonge to Promissory Note in favor of Chris Marquez dated December 1,
2006. (26)
|
10.58
|
Second
Allonge to Promissory Note in favor of Chris Marquez dated July 26, 2007.
(26)
|
10.59
|
Consulting
Services Agreement with Jim Juliano dated January 5, 2009.
(26)
|
10.60
|
First
Amendment to Employment Agreement of Sally J.W. Ramsey dated December 15,
2008. (26)
|
10.61
|
Employment
Agreement of Richard Stromback dated December 28, 2007.
(25)
|
10.62
|
Office
Sublease dated September 30, 2008. (26)
|
10.63*
|
Securities
Purchase Agreement with Stromback Acquisition Corporation dated September
30, 2009.
|
10.64
|
Reynolds
Innovations Inc. Collaboration Agreement (26)
|
10.65*
|
Employment
Agreement with Robert G. Crockett dated September 21,
2009.
|
10.66*
|
Employment
Agreement with Daniel V. Iannotti dated September 21,
2009.
|
10.67*
|
Employment
Agreement with F. Thomas Krotine dated September 21,
2009.
|
10.68*
|
Second
Amendment of Employment Agreement with Sally J.W. Ramsey dated September
21, 2009.
|
10.69*
|
Promissory
Note in favor of Sky Blue Ventures in the amount of $6,500 dated September
10, 2009.
|
10.70*
|
Promissory
Note in favor of JB Smith LC in the amount of $7,716.40 dated August 11,
2009. (26)
|
21.1
|
List
of subsidiaries. (2)
|
23.1*
|
Consent
of UHY LLP, an independent registered public accounting
firm.
|
23.2*
|
Consent
of counsel, Daniel Iannotti (included in Exhibit 5.1).
|
24.1*
|
Power
of Attorney - See Signatures page.
|
99.1
|
Financial
statements from Form 10-K for the fiscal year ended September 30, 2009
filed with the SEC on December 22,
2009.
|
68
* Filed
herewith.
(1)
Incorporated by reference from OCIS’ registration statement on Form SB-2
originally filed with the SEC on September 28, 2002 and amended on September 20,
2002, November 7, 2002 and March 27, 2003.
(2)
Incorporated by reference from our Form 8-K filed with the SEC on July 30,
2007.
(3)
Incorporated by reference from our From 8-K filed with the SEC on February 12,
2008.
(4)
Incorporated by reference from our Form 8-K filed with the SEC on February 22,
2008.
(5)
Incorporated by reference from our Form 8-K filed with the SEC on March 20,
2008.
(6)
Incorporated by reference from our Form 8-K filed with the SEC on April 3,
2008.
(7)
Incorporated by reference from our Form 8-K filed with the SEC on September 24,
2008.
(8)
Incorporated by reference from our Form 8-K filed with the SEC on July 17,
2008.
(9)
Incorporated by reference from our Form 8-K/A filed with the SEC on August 29,
2008.
(10)
Incorporated by reference from our Form 8-K filed with the SEC on September 19,
2008.
(11)
Incorporated by reference from our Form 8-K filed with the SEC on October 28,
2008.
(12)
Incorporated by reference from our Form 8-K filed with the SEC on November 13,
2008.
(13)
Incorporated by reference from our Form 10-KSB filed with the SEC on December
24, 2008.
(15)
Incorporated by reference from our Form 8-K filed with the SEC on September 30,
2008.
(16)
Incorporated by reference from our Form 8-K filed with the SEC on January 9,
2009.
(17)
Incorporated by reference from our Form 8-K filed with the SEC on January 23,
2009.
(18)
Incorporated by reference from our Form 8-K filed with the SEC on February 12,
2009.
(19)
Incorporated by reference from our Form 8-K filed with the SEC on February 27,
2009.
(21)
Incorporated by reference from our Form 8-K filed with the SEC on March 10,
2009.
(22)
Incorporated by reference from our Form 8-K filed with the SEC on March 27,
2009.
(23)
Incorporated by reference from our Form 8-K filed with the SEC on August 5,
2009.
(24)
Incorporation by reference from our Form 8-K filed with the SEC on July 29,
2009.
(25)
Incorporation by reference from our Form 8-K filed with the SEC on January 3,
2008.
(26)
Incorporation by reference from our Amendments to this S-1 registration
statement previously filed with the SEC on September 10, 2009 and October 20,
2009.
69
ITEM
17: UNDERTAKINGS
The
undersigned registrant hereby undertakes to file, during any period in which
offers or sales are being made, a post-effective amendment to this registration
statement:
(i) To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
The
undersigned registrant hereby undertakes that, for the purpose of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
The
undersigned registrant hereby undertakes to remove from registration by means of
a post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 14 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
That, for
the purpose of determining liability under the Securities Act of 1933 to any
purchaser: if the registrant is subject to Rule
430C, each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
70
SIGNATURES
The
registrant has duly caused this amendment No. 3 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, this 11th
day of January, 2010 in the City of Auburn Hills, Michigan.
ECOLOGY
COATINGS, INC.,
a
Nevada corporation
|
||||
By:
|
/s/ Robert G. Crockett
|
|||
Robert
G. Crockett
|
||||
CEO
|
||||
Pursuant
to the requirements of the Securities Act of 1933, as amended, this amendment
toregistration statement has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures
|
Title
|
Date
|
||
/s/
Robert G. Crockett
Robert
G. Crockett
|
Chief
Executive Officer
(Principal
Executive Officer)
|
January
11, 2010
|
||
/s/Kevin
P. Stolz
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
January
11, 2010
|
||
/s/
J.B. Smith*
J.B.
Smith
|
Director
|
January
11, 2010
|
||
/s/
Rocco DelMonaco*
Rocco
DelMonaco
|
Director
|
January
11, 2010
|
||
/s/
Joseph Nirta*
|
Director
|
January
11, 2010
|
||
Joseph Nirta
|
||||
71
*By: /s/ Robert G.
Crockett
Robert G. Crockett,
Attorney-In-Fact
72